NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, unless noted and except per share amounts)
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
On March 28, 2019, STERIS plc, a public limited company organized under the laws of England and Wales (“STERIS UK”), completed a redomiciliation from the United Kingdom to Ireland (the “Redomiciliation”). The Redomiciliation was achieved through the insertion of a new Irish public limited holding company (“STERIS plc”) on top of STERIS UK pursuant to a court-approved scheme of arrangement under English law (the “Scheme”). Following the Scheme effectiveness, STERIS UK was re-registered as a private limited company with the name STERIS Limited, and STERIS Emerald IE Limited, a company established in Ireland and a wholly-owned direct subsidiary of STERIS plc, was interposed as the direct parent company of STERIS UK.
STERIS is a leading provider of infection prevention and other procedural products and services. Our focus is primarily on healthcare, pharmaceutical and medical device Customers. We offer Customers a unique mix of innovative capital equipment products, such as sterilizers and washers, surgical tables, lights and equipment management systems and connectivity solutions such as operating room integration; consumable products such as detergents and gastrointestinal endoscopy accessories and other products; and services, including capital equipment installation and maintenance, contract sterilization and microbial reduction of medical devices, instrument and scope repair solutions, testing and validation services and instrument reprocessing.
Our fiscal year ends on March 31. References in this Quarterly Report to a particular “year” or “year-end” mean our fiscal year. The significant accounting policies applied in preparing the accompanying consolidated financial statements of the Company are summarized below:
Interim Financial Statements
We prepared the accompanying unaudited consolidated financial statements of the Company according to accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. This means that they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Our unaudited interim consolidated financial statements contain all material adjustments (including normal recurring accruals and adjustments) management believes are necessary to fairly state our financial condition, results of operations, cash flows and shareholders' equity for the periods presented.
These interim consolidated financial statements should be read together with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended March 31, 2019, dated May 30, 2019. The Consolidated Balance Sheet at March 31, 2019 was derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
Principles of Consolidation
We use the consolidation method to report our investment in our subsidiaries. Therefore, the accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. We eliminate inter-company accounts and transactions when we consolidate these accounts. Investments in equity of unconsolidated affiliates, over which the Company has significant influence, but not control, over the financial and operating polices, are accounted for primarily using the equity method. These investments are immaterial to the Company's Consolidated Financial Statements.
Use of Estimates
We make certain estimates and assumptions when preparing financial statements according to U.S. GAAP that affect the reported amounts of assets and liabilities at the financial statement dates and the reported amounts of revenues and expenses during the periods presented. These estimates and assumptions involve judgments with respect to many factors that are difficult to predict and are beyond our control. Actual results could be materially different from these estimates. We revise the estimates and assumptions as new information becomes available. This means that operating results for the three and nine month periods ended December 31, 2019 are not necessarily indicative of results that may be expected for future quarters or for the full fiscal year ending March 31, 2020.
Revenue Recognition and Associated Liabilities
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
We adopted Accounting Standards Update ("ASU") 2014-09 “Revenue from Contracts with Customers” and the subsequently issued amendments on April 1, 2018 using the modified retrospective approach to contracts that were not completed as of April 1, 2018. Under this standard, certain capital equipment contracts are comprised of a single performance obligation, resulting in the deferral of the corresponding capital equipment revenue and cost of revenues until installation is complete. Previously, these capital equipment revenues and cost of revenues were recognized based upon shipping terms. We recorded a cumulative effect adjustment in the beginning of fiscal 2019 to Retained earnings of $5,637, based on the current terms and conditions for certain open capital equipment contracts as of March 31, 2018.
Revenue is recognized when obligations under the terms of the contract are satisfied and control of the promised products or services have transferred to the Customer. Revenues are measured at the amount of consideration that we expect to be paid in exchange for the products or services. Product revenue is recognized when control passes to the Customer, which is generally based on contract or shipping terms. Service revenue is recognized when the Customer benefits from the service, which occurs either upon completion of the service or as it is provided to the Customer. Our Customers include end users as well as dealers and distributors who market and sell our products. Our revenue is not contingent upon resale by the dealer or distributor, and we have no further obligations related to bringing about resale. Our standard return and restocking fee policies are applied to sales of products. Shipping and handling costs charged to Customers are included in Product revenues. The associated expenses are treated as fulfillment costs and are included in Cost of revenues. Revenues are reported net of sales and value-added taxes collected from Customers.
We have individual Customer contracts that offer discounted pricing. Dealers and distributors may be offered sales incentives in the form of rebates. We reduce revenue for discounts and estimated returns, rebates, and other similar allowances in the same period the related revenues are recorded. The reduction in revenue for these items is estimated based on historical experience and trend analysis to the extent that it is probable that a significant reversal of revenue will not occur. Estimated returns are recorded gross on the Consolidated Balance Sheets.
In transactions that contain multiple performance obligations, such as when products, maintenance services, and other services are combined, we recognize revenue as each product is delivered or service is provided to the Customer. We allocate the total arrangement consideration to each performance obligation based on its relative standalone selling price, which is the price for the product or service when it is sold separately.
Payment terms vary by the type and location of the Customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. We do not evaluate whether the selling price contains a financing component for contracts that have a duration of less than one year.
We do not capitalize sales commissions as substantially all of our sales commission programs have an amortization period of one year or less.
Certain costs to fulfill a contract are capitalized and amortized over the term of the contract if they are recoverable, directly related to a contract and generate resources that we will use to fulfill the contract in the future. At December 31, 2019, assets related to costs to fulfill a contract were not material to our Consolidated Financial Statements.
Refer to Note 9, titled "Business Segment Information" for disaggregation of revenue.
Product Revenue
Product revenues consist of revenues generated from sales of consumables and capital equipment. These contracts are primarily based on a Customer’s purchase order and may include a Distributor, Dealer or Group Purchasing Organization (GPO) agreement. We recognize revenue for sales of product when control passes to the Customer, which generally occurs either when the products are shipped or when they are received by the Customer. Revenue related to certain capital equipment products is deferred until installation is complete as the capital equipment and installation are highly integrated and form a single performance obligation.
Service Revenue
Within our Healthcare Products and Life Sciences segments, service revenues consist of revenue generated from parts and labor associated with the maintenance, repair and installation of capital equipment. These contracts are primarily based on a Customer’s purchase order and may include a Distributor, Dealer, or GPO agreement. For maintenance, repair and installation of capital equipment, revenue is recognized upon completion of the service.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
We also offer preventive maintenance and separately priced extended warranty agreements to our Customers, which require us to maintain and repair our products over the duration of the contract. Generally, these contract terms are cancelable without penalty and range from one to five years. Amounts received under these Customer contracts are initially recorded as a service liability and are recognized as service revenue ratably over the contract term using a time-based input measure.
Within our Healthcare Specialty Services segment, revenues relate primarily to outsourced reprocessing services and instrument repairs. Contracts for outsourced reprocessing services are primarily based on an agreement with a Customer, ranging in length from several months to 15 years. Outsourced reprocessing services revenue is recognized ratably over the contract term using a time-based input measure, adjusted for volume and other performance metrics, to the extent that it is probable that a significant reversal of revenue will not occur. Contracts for instrument repairs are primarily based on a Customer’s purchase order, and the associated revenue is recognized upon completion of the repair.
Within our Applied Sterilization Technologies segment, service revenues include contract sterilization and laboratory services. Sales contracts for contract sterilization and laboratory services are primarily based on a Customer’s purchase order and associated Customer agreement and revenues are generally recognized upon completion of the service.
Contract Liabilities
Payments received from Customers are based on invoices or billing schedules as established in contracts with Customers. Deferred revenue is recorded when payment is received in advance of performance under the contract. Deferred revenue is recognized as revenue upon completion of the performance obligation, which generally occurs within one year. During the first nine months of fiscal 2020, $46,744 of the March 31, 2019 deferred revenue balance was recorded as revenue. During the first nine months of fiscal 2019, $25,590 of the March 31, 2018 deferred revenue balance was recorded as revenue.
Refer to Note 6, titled "Additional Consolidated Balance Sheet Information" for Deferred revenue balances.
Service Liabilities
Payments received in advance of performance for cancelable preventative maintenance and separately priced extended warranty contracts are recorded as service liabilities. Service liabilities are recognized as revenue as performance is rendered under the contract.
Refer to Note 6, titled "Additional Consolidated Balance Sheet Information" for Service liability balances.
Remaining Performance Obligations
Remaining performance obligations reflect only the performance obligations related to agreements for which we have a firm commitment from a Customer to purchase, and exclude variable consideration related to unsatisfied performance obligations. With regard to products, these remaining performance obligations include capital equipment and consumable orders which have not shipped. With regard to service, these remaining performance obligations primarily include installation, certification, and outsourced reprocessing services. As of December 31, 2019, the transaction price allocated to remaining performance obligations was approximately $960,000. We expect to recognize approximately 48% of the transaction price within one year and approximately 44% beyond one year. The remainder has yet to be scheduled for delivery.
Recently Issued Accounting Standards Impacting the Company
Recently Issued Accounting Standards Impacting the Company are presented in the following table:
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard
|
|
Date of Issuance
|
|
Description
|
|
Date of Adoption
|
|
Effect on the financial statements or other significant matters
|
|
Standards that have recently been adopted
|
|
ASU 2016-02, "Leases"
(Topic 842)
|
|
February 2016
|
|
The standard requires lessees to record all leases, whether finance or operating, on the balance sheet. An asset will be recorded to represent the right to use the leased asset, and a liability will be recorded to represent the lease obligation. The standard is effective for annual periods beginning after December 15, 2018 and interim periods within that period. Early adoption is permitted.
|
|
First Quarter Fiscal 2020
|
|
We adopted this standard, and related amendments, effective April 1, 2019 using the modified retrospective transition method and have not restated prior periods. We elected to use the package of practical expedients permitted under the transition guidance, which allows the carry forward of historical lease classification of existing leases. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing or expired agreements. We made an accounting policy election to not recognize lease assets or liabilities for leases with a term of 12 months or less and elected to not separate non-lease components from lease components to which they relate for all asset classes. We recorded lease right-of-use assets and lease liabilities for operating leases totaling $120,562. The adoption of the standard did not have a material impact to the Consolidated Statements of Income or Cash Flows. Additional information is disclosed in Note 8 under the heading "Leases".
|
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
ASU 2017-12
"Targeted Improvements to Accounting for Hedging Activities" (Topic 815)
|
|
August 2017
|
|
The standard provides targeted improvements to accounting for hedging activities by expanding an entity’s ability to hedge non-financial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted in any interim period after issuance of the standard.
|
|
First Quarter Fiscal 2020
|
|
We adopted this standard effective April 1, 2019 with no material impact to our Consolidated Balance Sheets. The impact to our Consolidated Statements of Income will depend on the value of future hedging activities.
|
|
ASU 2018-02
"Income Statement - Reporting Comprehensive Income" (Topic 220)
|
|
February 2018
|
|
The standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act ("TCJA") and requires certain disclosures about stranded tax effects. The underlying guidance requiring that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. This standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Early adoption is permitted.
|
|
First Quarter Fiscal 2020
|
|
We have elected not to reclassify the income tax effects of the TCJA from Accumulated Other Comprehensive Income ("AOCI") to retained earnings. Our policy is to release income tax effects from AOCI when individual units of account are sold or terminated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standards that have not yet been adopted
|
|
ASU 2016-13, "Measurement of Credit Losses on Financial Instruments"
|
|
June 2016
|
|
The standard requires a financial asset (or group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. The standard is effective for annual periods beginning after December 15, 2019. Early adoption is permitted.
|
|
N/A
|
|
We are in the process of evaluating the impact that the standard will have on our consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
ASU 2018-13 "Fair Value Measurement (Topic 820) Disclosure Framework- Changes to Disclosure Requirements for Fair Value Measurement”
|
|
August 2018
|
|
The standard modifies the disclosure requirements by adding, removing, and modifying certain required disclosures for fair value measurements for assets and liabilities disclosed within the fair value hierarchy. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and early adoption is permitted.
|
|
N/A
|
|
We do not expect this standard to have a material impact on our consolidated financial statements as it modifies disclosure requirements only.
|
|
ASU 2018-14 "Compensation- Retirement Benefits - Defined Benefit Plans- General Topic (715-20): Disclosure Framework- Changes to the Disclosure Requirements for Defined Benefit Plans"
|
|
August 2018
|
|
The standard modifies the disclosure requirements by adding, removing, and modifying certain required disclosures for employers that sponsor defined benefit pension or other post-retirement benefit plans. The standard also clarifies disclosure requirements for defined benefit pension plans relating to the projected benefit obligation and accumulated benefit obligation. The standard is effective for fiscal years ending after December 15, 2019 and early adoption is permitted.
|
|
N/A
|
|
We do not expect this standard to have a material impact on our consolidated financial statements as it modifies disclosure requirements only.
|
|
ASU 2018-15 "Intangibles- Goodwill and Other- Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract"
|
|
August 2018
|
|
The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or
obtain internal-use software. The standard is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted.
|
|
N/A
|
|
We do not expect this standard to have a material impact on our consolidated financial statements.
|
|
ASU 2018-12 “Income Taxes (Topic 740)
|
|
December 2019
|
|
The standard provides final guidance that simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance simplifies accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for fiscal years ending after December 15, 2020 and early adoption is permitted.
|
|
N/A
|
|
We are in the process of evaluating the impact that the standard will have on our consolidated financial statements.
|
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
A detailed description of our significant and critical accounting policies, estimates, and assumptions is included in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2019, dated May 30, 2019. Our significant and critical accounting policies, estimates, and assumptions have not changed materially from March 31, 2019.
2. Restructuring
Fiscal 2019 Restructuring Plan. During the third quarter of fiscal 2019, we adopted and announced a targeted restructuring plan (the "Fiscal 2019 Restructuring Plan"), which included the closure of two manufacturing facilities, one in Brazil and one in England, as well as other actions including the rationalization of certain products. Fewer than 200 positions were eliminated. The Company has relocated the production of certain impacted products to other existing manufacturing operations during fiscal 2020. These restructuring actions were designed to enhance profitability and improve efficiency.
Since inception of the Fiscal 2019 Restructuring Plan we have incurred pre-tax expenses totaling $44,036 related to these restructuring actions, of which $31,654 was recorded as restructuring expenses and $12,382 was recorded in cost of revenues, with a total of $31,278, $2,518, $668 and $7,798 related to the Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies segments, respectively. Corporate related restructuring charges were $1,774. Additional restructuring expenses related to this plan are not expected to be material to our results of operations.
The following table summarizes our total pre-tax restructuring expenses for fiscal 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Nine Months Ended December 31,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Fiscal 2019 Restructuring Plan
|
|
|
|
|
|
|
|
|
Severance and other compensation related costs
|
$
|
(696
|
)
|
|
$
|
2,743
|
|
|
$
|
1,407
|
|
|
$
|
2,743
|
|
|
Loss (gain) on disposal of asset
|
—
|
|
|
15,251
|
|
|
(1,164
|
)
|
|
15,251
|
|
|
Asset impairment
|
—
|
|
|
4,312
|
|
|
—
|
|
|
4,312
|
|
|
Lease termination costs and other
|
248
|
|
|
3,841
|
|
|
424
|
|
|
3,841
|
|
|
Product rationalization (1)
|
833
|
|
|
9,096
|
|
|
2,661
|
|
|
9,096
|
|
|
Total restructuring expenses
|
$
|
385
|
|
|
$
|
35,243
|
|
|
$
|
3,328
|
|
|
$
|
35,243
|
|
(1) Recorded in cost of revenues on the Consolidated Statements of Income.
Liabilities related to restructuring activities are recorded as current liabilities on the accompanying Consolidated Balance Sheets within “Accrued payroll and other related liabilities” and “Accrued expenses and other.” The following table summarizes our restructuring liability balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019 Restructuring Plan
|
|
March 31,
2019
|
|
Provisions
|
|
Payments (1)
|
|
December 31,
2019
|
|
Severance and termination benefits
|
|
$
|
4,102
|
|
|
$
|
1,407
|
|
|
$
|
(4,279
|
)
|
|
$
|
1,230
|
|
|
Lease termination obligations and other
|
|
2,029
|
|
|
424
|
|
|
(2,020
|
)
|
|
433
|
|
|
Total
|
|
$
|
6,131
|
|
—
|
|
$
|
1,831
|
|
—
|
|
$
|
(6,299
|
)
|
—
|
|
$
|
1,663
|
|
(1) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
3. Inventories, Net
We use the last-in, first-out (“LIFO”) and first-in, first-out (“FIFO”) cost methods to value inventory. Inventory valued using the LIFO cost method is stated at the lower of cost or market. Inventory valued using the FIFO cost method is stated at the lower of cost or net realizable value. An actual valuation of inventory under the LIFO method is made only at the end of the fiscal year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and are subject to the final fiscal year-end LIFO inventory valuation. Inventory costs include material, labor, and overhead. Inventories, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
March 31,
2019
|
|
Raw materials
|
|
$
|
93,687
|
|
|
$
|
83,009
|
|
|
Work in process
|
|
35,936
|
|
|
30,694
|
|
|
Finished goods
|
|
158,889
|
|
|
131,051
|
|
|
LIFO reserve
|
|
(17,804
|
)
|
|
(16,757
|
)
|
|
Reserve for excess and obsolete inventory
|
|
(18,662
|
)
|
|
(19,754
|
)
|
|
Inventories, net
|
|
$
|
252,046
|
|
|
$
|
208,243
|
|
4. Property, Plant and Equipment
Information related to the major categories of our depreciable assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
March 31,
2019
|
|
Land and land improvements (1)
|
|
$
|
66,874
|
|
|
$
|
63,522
|
|
|
Buildings and leasehold improvements
|
|
510,027
|
|
|
480,359
|
|
|
Machinery and equipment
|
|
683,657
|
|
|
656,956
|
|
|
Information systems
|
|
174,945
|
|
|
169,711
|
|
|
Radioisotope
|
|
509,609
|
|
|
483,080
|
|
|
Construction in progress (1)
|
|
180,172
|
|
|
133,689
|
|
|
Total property, plant, and equipment
|
|
2,125,284
|
|
|
1,987,317
|
|
|
Less: accumulated depreciation and depletion
|
|
(1,022,680
|
)
|
|
(955,735
|
)
|
|
Property, plant, and equipment, net
|
|
$
|
1,102,604
|
|
|
$
|
1,031,582
|
|
|
|
|
|
(1)
|
Land is not depreciated. Construction in progress is not depreciated until placed in service.
|
5. Debt
Indebtedness was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
March 31,
2019
|
|
Credit Agreement
|
|
$
|
255,217
|
|
|
$
|
301,846
|
|
|
Private Placement
|
|
885,237
|
|
|
884,967
|
|
|
Deferred financing costs
|
|
(3,490
|
)
|
|
(3,619
|
)
|
|
Other
|
|
—
|
|
|
33
|
|
|
Total long term debt
|
|
$
|
1,136,964
|
|
|
$
|
1,183,227
|
|
Additional information regarding our indebtedness is included in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2019, dated May 30, 2019.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
6. Additional Consolidated Balance Sheet Information
Additional information related to our Consolidated Balance Sheets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
March 31,
2019
|
|
Accrued payroll and other related liabilities:
|
|
|
|
|
|
Compensation and related items
|
|
$
|
29,744
|
|
|
$
|
37,251
|
|
|
Accrued vacation/paid time off
|
|
11,113
|
|
|
10,191
|
|
|
Accrued bonuses
|
|
40,902
|
|
|
40,194
|
|
|
Accrued employee commissions
|
|
15,808
|
|
|
17,854
|
|
|
Other postretirement benefit obligations-current portion
|
|
1,633
|
|
|
1,633
|
|
|
Other employee benefit plans obligations-current portion
|
|
2,046
|
|
|
1,935
|
|
|
Total accrued payroll and other related liabilities
|
|
$
|
101,246
|
|
|
$
|
109,058
|
|
|
Accrued expenses and other:
|
|
|
|
|
|
Deferred revenues
|
|
$
|
45,355
|
|
|
$
|
55,333
|
|
|
Service liabilities
|
|
44,701
|
|
|
42,101
|
|
|
Self-insured risk reserves-current portion
|
|
7,475
|
|
|
6,537
|
|
|
Accrued dealer commissions
|
|
16,621
|
|
|
15,283
|
|
|
Accrued warranty
|
|
7,128
|
|
|
7,194
|
|
|
Asset retirement obligation-current portion
|
|
2,669
|
|
|
2,656
|
|
|
Other
|
|
53,698
|
|
|
58,661
|
|
|
Total accrued expenses and other
|
|
$
|
177,647
|
|
|
$
|
187,765
|
|
|
Other liabilities:
|
|
|
|
|
|
Self-insured risk reserves-long-term portion
|
|
$
|
14,445
|
|
|
$
|
14,445
|
|
|
Other postretirement benefit obligations-long-term portion
|
|
8,740
|
|
|
10,918
|
|
|
Defined benefit pension plans obligations-long-term portion
|
|
15,001
|
|
|
16,168
|
|
|
Other employee benefit plans obligations-long-term portion
|
|
2,645
|
|
|
4,711
|
|
|
Accrued long-term income taxes
|
|
13,586
|
|
|
13,515
|
|
|
Asset retirement obligation-long-term portion
|
|
10,077
|
|
|
9,730
|
|
|
Other
|
|
26,854
|
|
|
18,325
|
|
|
Total other liabilities
|
|
$
|
91,348
|
|
|
$
|
87,812
|
|
7. Income Tax Expense
The Tax Cuts and Jobs Act (the “TCJA”) was enacted on December 22, 2017. The TCJA reduced the maximum U.S. federal corporate income tax rate to 21.0%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign sourced earnings. The Company applied the guidance in Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cut and Jobs Act when accounting for the enactment-date effects of the TCJA. We consider the tax expense recorded for the TCJA to be complete at this time. However, it is possible that additional legislation, regulations, interpretations and/or guidance may be issued in the future that may result in additional adjustments to the tax expense recorded related to the TCJA. We will continue to monitor and assess the impact of any new developments.
The effective income tax rates for the three month periods ended December 31, 2019 and 2018 were 21.9% and 16.2%, respectively. The effective income tax rates for the nine month periods ended December 31, 2019 and 2018 were 18.8% and 16.9%, respectively. The increase in the fiscal 2020 rates compared to the prior year periods is primarily attributable to increased profits earned in higher tax jurisdictions.
Income tax expense is provided on an interim basis based upon our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. In determining the estimated annual effective income tax rate, we analyze various
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
factors, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and net operating loss carry forwards, and available tax planning alternatives.
We operate in numerous taxing jurisdictions and are subject to regular examinations by various United States federal, state and local, as well as foreign jurisdictions. We are no longer subject to United States federal examinations for years before fiscal 2016 and, with limited exceptions, we are no longer subject to United States state and local, or non-United States, income tax examinations by tax authorities for years before fiscal 2015. We remain subject to tax authority audits in various jurisdictions wherever we do business.
In May 2019, we received two notices of proposed tax adjustment from the U.S. Internal Revenue Service (the “IRS”) regarding the deductibility of interest paid on certain intercompany debt. The notices relate to fiscal years 2016 and 2017. In September 2019, we received another notice of proposed adjustment for the same issue, for the 2018 fiscal year. The IRS adjustments would result in a cumulative tax liability of approximately $40,000. We are contesting the IRS’s assertions, and intend to pursue available remedies such as appeals and litigation, if necessary. We have not established reserves related to these notices. An unfavorable outcome is not expected to have a material adverse impact on our consolidated financial position but could be material to our consolidated results of operations and cash flows for any one period.
8. Commitments and Contingencies
We are, and will likely continue to be, involved in a number of legal proceedings, government investigations, and claims, which we believe generally arise in the course of our business, given our size, history, complexity, and the nature of our business, products, Customers, regulatory environment, and industries in which we participate. These legal proceedings, investigations and claims generally involve a variety of legal theories and allegations, including, without limitation, personal injury (e.g., slip and falls, burns, vehicle accidents), product liability or regulation (e.g., based on product operation or claimed malfunction, failure to warn, failure to meet specification, or failure to comply with regulatory requirements), product exposure (e.g., claimed exposure to chemicals, asbestos, contaminants, radiation), property damage (e.g., claimed damage due to leaking equipment, fire, vehicles, chemicals), commercial claims (e.g., breach of contract, economic loss, warranty, misrepresentation), financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for damage and relief.
We believe we have adequately reserved for our current litigation and claims that are probable and estimable, and further believe that the ultimate outcome of these pending lawsuits and claims will not have a material adverse effect on our consolidated financial position or results of operations taken as a whole. Due to their inherent uncertainty, however, there can be no assurance of the ultimate outcome or effect of current or future litigation, investigations, claims or other proceedings (including without limitation the matters discussed below). For certain types of claims, we presently maintain insurance coverage for personal injury and property damage and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us.
On May 31, 2012, our Albert Browne Limited subsidiary received a warning letter from the FDA regarding chemical indicators manufactured in the United Kingdom. These devices are intended for the monitoring of certain sterilization and other processes. The FDA warning letter states that the agency has concerns regarding operational business processes. We do not believe that the FDA's concerns are related to product performance, or that they result from Customer complaints. We have reviewed our processes with the agency and finalized our remediation measures. We do not currently believe that the impact of this event will have a material adverse effect on our financial results.
Civil, criminal, regulatory or other proceedings involving our products or services could possibly result in judgments, settlements or administrative or judicial decrees requiring us, among other actions, to pay damages or fines or effect recalls, or be subject to other governmental, Customer or other third party claims or remedies, which could materially effect our business, performance, prospects, value, financial condition, and results of operations.
For additional information regarding these matters, see the following portions of our Annual Report on Form 10-K for the year ended March 31, 2019, dated May 30, 2019: Item 1 titled, "Business - Information with respect to our Business in General - Government Regulation", the "Risk Factors" in Item 1A thereof titled, "Product related regulations and claims", and the "Risk Factors", in Part II Item 1A hereof.
From time to time, STERIS is also involved in legal proceedings as a plaintiff involving contract, patent protection, and other claims asserted by us. Gains, if any, from these proceedings are recognized when they are realized.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
We are subject to taxation from United States federal, state and local, and non-U.S. jurisdictions. Tax positions are settled primarily through the completion of audits within each individual jurisdiction or the closing of statutes of limitation. Changes in applicable tax law or other events may also require us to revise past estimates. We describe income taxes further in Note 7 to our consolidated financial statements titled, “Income Tax Expense” in this Quarterly Report on Form 10-Q.
Leases
We lease manufacturing, warehouse and office space, service facilities, vehicles, equipment and communication systems. Certain leases contain options that provide us with the ability to extend the lease term. Such options are included in the lease term when it is reasonably certain that the option will be exercised. We made an accounting policy election to not recognize lease assets or lease liabilities for leases with a lease term of twelve months or less.
We determine if an agreement contains a lease and classify our leases as operating or finance at the lease commencement date. Finance leases are generally those leases for which we will pay substantially all the underlying asset’s fair value or will use the asset for all or a major part of its economic life, including circumstances in which we will ultimately own the asset. Lease assets arising from finance leases are included in property, plant and equipment, net and the liabilities are included in other liabilities. For finance leases, we recognize interest expense using the effective interest method and we recognize amortization expense on the lease asset over the shorter of the lease term or the useful life of the asset. Our finance leases are not material as of December 31, 2019 and for the nine month period then ended.
Operating lease assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. Lease assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. As most leases do not provide an implicit interest rate, we estimate an incremental borrowing rate to determine the present value of lease payments. Our estimated incremental borrowing rate reflects a secured rate based on recent debt issuances, our estimated credit rating, lease term, as well as publicly available data for instruments with similar characteristics. For operating leases, we recognize lease cost on a straight-line basis over the term of the lease. When accounting for leases, we combine payments for leased assets, related services and other components of a lease.
The components of operating lease expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, 2019
|
|
Nine months ended December 31, 2019
|
|
Fixed operating lease expense
|
$
|
7,079
|
|
|
$
|
20,894
|
|
|
Variable operating lease expense
|
1,981
|
|
|
4,240
|
|
|
Total operating lease expense
|
$
|
9,060
|
|
|
$
|
25,134
|
|
Supplemental cash flow information related to operating leases is as follows:
|
|
|
|
|
|
|
|
|
Nine months ended December 31, 2019
|
|
|
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
$
|
20,656
|
|
|
Right-of-use assets obtained in exchange for operating lease obligations, net
|
$
|
27,089
|
|
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
Maturities of lease liabilities at December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
Remainder of 2020:
|
$
|
6,732
|
|
|
2021
|
22,915
|
|
|
2022
|
18,564
|
|
|
2023
|
15,185
|
|
|
2024
|
12,647
|
|
|
2025 and thereafter
|
85,388
|
|
|
Total operating lease payments
|
161,431
|
|
|
Less imputed interest
|
38,178
|
|
|
Total operating lease liabilities
|
$
|
123,253
|
|
Supplemental information related to operating leases is as follows:
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
Weighted-average remaining lease term of operating leases
|
11.6 years
|
|
|
|
|
|
Weighted-average discount rate of operating leases
|
4.6
|
%
|
Prior to the adoption of ASU 2016-02, " Leases" (Topic 842) future minimum annual rentals payable under noncancelable operating lease agreements in excess of one year as of March 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
2020
|
|
$
|
24,008
|
|
|
2021
|
|
18,567
|
|
|
2022
|
|
13,917
|
|
|
2023
|
|
11,929
|
|
|
2024 and thereafter
|
|
93,939
|
|
|
Total minimum lease payments
|
|
$
|
162,360
|
|
In the preceding table, the future minimum annual rentals payable under noncancelable leases denominated in foreign currencies have been calculated using March 31, 2019 foreign currency exchange rates.
9. Business Segment Information
We operate and report our financial information in four reportable business segments: Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies. Non-allocated operating costs that support the entire Company and items not indicative of operating trends are excluded from segment operating income.
Our Healthcare Products segment offers infection prevention and procedural solutions for healthcare providers worldwide, including consumable products, equipment maintenance and installation services, and capital equipment.
Our Healthcare Specialty Services segment provides a range of specialty services for healthcare providers including hospital sterilization services, and instrument and scope repairs.
Our Life Sciences segment offers consumable products, equipment maintenance, specialty services and capital equipment for pharmaceutical manufacturers and research facilities.
Our Applied Sterilization Technologies segment offers contract sterilization and testing services for medical device and pharmaceutical manufacturers.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
We disclose a measure of segment income that is consistent with the way management operates and views the business. The accounting policies for reportable segments are the same as those for the consolidated Company.
For the three and nine months ended December 31, 2019, revenues from a single Customer did not represent ten percent or more of any reportable segment’s revenues. Additional information regarding our segments is included in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2019, dated May 30, 2019.
Financial information for each of our segments is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Nine Months Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Healthcare Products
|
|
$
|
365,353
|
|
|
$
|
338,264
|
|
|
$
|
1,025,421
|
|
|
$
|
951,779
|
|
|
Healthcare Specialty Services
|
|
143,869
|
|
|
127,761
|
|
|
414,816
|
|
|
374,564
|
|
|
Life Sciences
|
|
108,773
|
|
|
93,451
|
|
|
304,208
|
|
|
275,571
|
|
|
Applied Sterilization Technologies
|
|
156,266
|
|
|
136,762
|
|
|
463,459
|
|
|
412,043
|
|
|
Total revenues
|
|
$
|
774,261
|
|
|
$
|
696,238
|
|
|
$
|
2,207,904
|
|
|
$
|
2,013,957
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
Healthcare Products
|
|
$
|
89,849
|
|
|
$
|
82,820
|
|
|
$
|
250,510
|
|
|
$
|
217,011
|
|
|
Healthcare Specialty Services
|
|
15,378
|
|
|
16,007
|
|
|
48,267
|
|
|
44,422
|
|
|
Life Sciences
|
|
37,731
|
|
|
33,129
|
|
|
103,085
|
|
|
96,260
|
|
|
Applied Sterilization Technologies
|
|
65,468
|
|
|
54,798
|
|
|
198,889
|
|
|
164,417
|
|
|
Corporate
|
|
(45,260
|
)
|
|
(42,025
|
)
|
|
(151,613
|
)
|
|
(135,053
|
)
|
|
Total operating income before adjustments
|
|
$
|
163,166
|
|
|
$
|
144,729
|
|
|
$
|
449,138
|
|
|
$
|
387,057
|
|
|
Less: Adjustments
|
|
|
|
|
|
|
|
|
|
Amortization of acquired intangible assets (1)
|
|
$
|
17,508
|
|
|
$
|
33,894
|
|
|
$
|
53,407
|
|
|
$
|
68,907
|
|
|
Acquisition and integration related charges (2)
|
|
1,721
|
|
|
1,816
|
|
|
5,585
|
|
|
6,197
|
|
|
Redomiciliation and tax restructuring costs (3)
|
|
487
|
|
|
4,747
|
|
|
3,274
|
|
|
5,633
|
|
|
(Gain) on fair value adjustment of acquisition related contingent consideration (1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(842
|
)
|
|
Net loss (gain) on divestiture of businesses (1)
|
|
76
|
|
|
(1,170
|
)
|
|
2,553
|
|
|
(508
|
)
|
|
Amortization of property "step up" to fair value (1)
|
|
602
|
|
|
615
|
|
|
1,783
|
|
|
1,840
|
|
|
Restructuring charges (4)
|
|
385
|
|
|
35,243
|
|
|
3,328
|
|
|
35,243
|
|
|
Total operating income
|
|
$
|
142,387
|
|
|
$
|
69,584
|
|
|
$
|
379,208
|
|
|
$
|
270,587
|
|
(1) For more information regarding our recent acquisitions and divestitures see Note 17 titled, "Business Acquisitions and Divestitures", as well as our Annual Report on Form 10-K for the year ended March 31, 2019, dated May 30, 2019.
(2) Acquisition and integration related charges include transaction costs and integration expenses associated with acquisitions.
(3) Costs incurred in connection with the Redomiciliation.
(4) For more information regarding our restructuring activities see Note 2 titled, "Restructuring".
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
Additional information regarding our fiscal 2020 and fiscal 2019 revenue is disclosed in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Nine Months Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Healthcare Products:
|
|
|
|
|
|
|
|
|
|
Capital equipment
|
|
$
|
148,016
|
|
|
$
|
143,180
|
|
|
$
|
410,249
|
|
|
$
|
384,086
|
|
|
Consumables
|
|
121,517
|
|
|
107,451
|
|
|
338,691
|
|
|
309,545
|
|
Service
|
|
95,820
|
|
|
87,633
|
|
|
276,481
|
|
|
258,148
|
|
|
Total Healthcare Products Revenues
|
|
$
|
365,353
|
|
|
$
|
338,264
|
|
|
$
|
1,025,421
|
|
|
$
|
951,779
|
|
|
Total Healthcare Specialty Services Revenues
|
|
$
|
143,869
|
|
|
$
|
127,761
|
|
|
$
|
414,816
|
|
|
$
|
374,564
|
|
|
Life Sciences:
|
|
|
|
|
|
|
|
|
|
Capital equipment
|
|
$
|
31,762
|
|
|
$
|
23,363
|
|
|
$
|
84,993
|
|
|
$
|
72,289
|
|
|
Consumables
|
|
46,370
|
|
|
41,157
|
|
|
132,939
|
|
|
119,844
|
|
|
Service
|
|
30,641
|
|
|
28,931
|
|
|
86,276
|
|
|
83,438
|
|
|
Total Life Sciences Revenues
|
|
$
|
108,773
|
|
|
$
|
93,451
|
|
|
$
|
304,208
|
|
|
$
|
275,571
|
|
|
Applied Sterilization Technologies Service Revenues
|
|
$
|
156,266
|
|
|
$
|
136,762
|
|
|
$
|
463,459
|
|
|
$
|
412,043
|
|
|
Total Revenues
|
|
$
|
774,261
|
|
|
$
|
696,238
|
|
|
$
|
2,207,904
|
|
|
$
|
2,013,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Nine Months Ended December 31,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Ireland
|
$
|
16,126
|
|
|
$
|
14,215
|
|
|
$
|
46,405
|
|
|
$
|
40,873
|
|
|
United States
|
562,502
|
|
|
494,328
|
|
|
1,611,755
|
|
|
1,423,101
|
|
|
Other locations
|
195,633
|
|
|
187,695
|
|
|
549,744
|
|
|
549,983
|
|
|
Total Revenues
|
$
|
774,261
|
|
|
$
|
696,238
|
|
|
$
|
2,207,904
|
|
|
$
|
2,013,957
|
|
10. Shares and Preferred Shares
Ordinary shares
In connection with the Redomiciliation, STERIS UK shareholders received STERIS plc shares pursuant to a scheme of arrangement under UK law. Each STERIS UK ordinary shareholder received one ordinary share, par value $75.00, of STERIS plc for each STERIS UK ordinary share held, which STERIS UK shares were canceled. On May 3, 2019, the par value of STERIS plc shares issued pursuit to the scheme of arrangement was reduced to $0.001 per share.
We calculate basic earnings per share based upon the weighted average number of shares outstanding. We calculate diluted earnings per share based upon the weighted average number of shares outstanding plus the dilutive effect of share equivalents calculated using the treasury stock method.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
The following is a summary of shares and share equivalents outstanding used in the calculations of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Nine Months Ended December 31,
|
|
Denominator (shares in thousands):
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Weighted average shares outstanding—basic
|
|
84,788
|
|
|
84,540
|
|
|
84,740
|
|
|
84,587
|
|
|
Dilutive effect of share equivalents
|
|
840
|
|
|
901
|
|
|
890
|
|
|
889
|
|
|
Weighted average shares outstanding and share equivalents—diluted
|
|
85,628
|
|
|
85,441
|
|
|
85,630
|
|
|
85,476
|
|
Options to purchase the following number of shares were outstanding but excluded from the computation of diluted earnings per share because the combined exercise prices, unamortized fair values, and assumed tax benefits upon exercise were greater than the average market price for the shares during the periods, so including these options would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Nine Months Ended December 31,
|
|
(shares in thousands)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Number of share options
|
|
347
|
|
|
435
|
|
|
270
|
|
|
331
|
|
Additional Authorized Shares
The Company has an additional authorized share capital of 50,000,000 preferred shares of $0.001 par value each, plus 25,000 deferred ordinary shares of €1.00 par value each, in order to satisfy minimum statutory capital requirements for all Irish public limited companies.
11. Repurchases of Ordinary Shares
On August 9, 2016, STERIS UK announced that its Board of Directors had authorized the purchase of up to $300,000 (net of taxes, fees and commissions) of our ordinary shares. As a result of the Redomiciliation, that share repurchase authorization terminated.
On May 7, 2019, our Board of Directors authorized the continuation of the share repurchase program resulting in a share repurchase authorization of $78,979 (net of taxes, fees and commissions).
On July 30, 2019, our Board of Directors approved an increase to the May 7, 2019 authorization of an additional amount of $300,000 (net of taxes, fees and commissions). As of December 31, 2019, there was approximately $348,979 (net of taxes, fees and commissions) of remaining availability under the authorization.
Under the authorizations, the Company may repurchase its shares from time to time through open market purchases, including 10b5-1 plans. Any repurchase program may be activated, suspended or discontinued at any time.
During the first nine months of fiscal 2020, we repurchased 205,059 of our ordinary shares for the aggregate amount of $30,000 (net of fees and commissions) pursuant to this authorization. During the first nine months of fiscal 2019, we repurchased 445,700 of our ordinary shares for the aggregate amount of $47,082 (net of fees and commissions) pursuant to the 2016 authorization.
During the first nine months of fiscal 2020, we obtained 100,124 of our ordinary shares in the aggregate amount of $10,318 in connection with share based compensation award programs. During the first nine months of fiscal 2019, we obtained 110,445 of our ordinary shares in the aggregate amount of $8,151 in connection with share based compensation award programs.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
12. Share-Based Compensation
We maintain a long-term incentive plan that makes available shares for grants, at the discretion of the Board of Directors or Compensation Committee of the Board of Directors, to officers, directors, and key employees in the form of stock options, restricted shares, restricted share units, stock appreciation rights and share grants. We satisfy share award incentives through the issuance of new ordinary shares.
Stock options provide the right to purchase our shares at the market price on the date of grant, or for options granted to employees in fiscal 2019 and thereafter, 110% of the market price on the date of grant, subject to the terms of the plan and agreements. Generally, one-fourth of the stock options granted to employees become exercisable for each full year of employment following the grant date. Stock options granted generally expire 10 years after the grant date, or in some cases earlier if the option holder is no longer employed by us. Restricted shares and restricted share units generally cliff vest after a four year period or vest in tranches of one-fourth of the number granted for each year of employment after the grant date. As of December 31, 2019, 3,921,680 ordinary shares remained available for grant under the long-term incentive plan.
The fair value of stock option awards was estimated at their grant date using the Black-Scholes-Merton option pricing model. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics that are not present in our option grants. If the model permitted consideration of the unique characteristics of employee stock options, the resulting estimate of the fair value of the stock options could be different. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statements of Income. The expense is classified as cost of goods sold or selling, general and administrative expenses in a manner consistent with the employee’s compensation and benefits.
The following weighted-average assumptions were used for options granted during the first nine months of fiscal 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2020
|
|
Fiscal 2019
|
|
Risk-free interest rate
|
|
2.26
|
%
|
|
2.64
|
%
|
|
Expected life of options
|
|
6.2 years
|
|
|
6.2 years
|
|
|
Expected dividend yield of stock
|
|
1.22
|
%
|
|
1.47
|
%
|
|
Expected volatility of stock
|
|
20.27
|
%
|
|
19.91
|
%
|
The risk-free interest rate is based upon the U.S. Treasury yield curve. The expected life of options is reflective of historical experience, vesting schedules and contractual terms. The expected dividend yield of stock represents our best estimate of the expected future dividend yield. The expected volatility of stock is derived by referring to our historical stock prices over a time frame similar to that of the expected life of the grant. An estimated forfeiture rate of 2.77% and 2.37% was applied in fiscal 2020 and 2019, respectively. This rate is calculated based upon historical activity and represents an estimate of the granted options not expected to vest. If actual forfeitures differ from this calculated rate, we may be required to make additional adjustments to compensation expense in future periods. The assumptions used above are reviewed at the time of each significant option grant, or at least annually.
A summary of share option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted
Average
Exercise
Price Per Share
|
|
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at March 31, 2019
|
|
2,104,685
|
|
|
$
|
72.82
|
|
|
|
|
|
|
Granted
|
|
345,138
|
|
|
147.22
|
|
|
|
|
|
|
Exercised
|
|
(415,072
|
)
|
|
55.24
|
|
|
|
|
|
|
Forfeited
|
|
(13,264
|
)
|
|
102.06
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
2,021,487
|
|
|
$
|
88.94
|
|
|
6.9 years
|
|
$
|
128,323
|
|
|
Exercisable at December 31, 2019
|
|
1,120,722
|
|
|
$
|
68.12
|
|
|
5.7 years
|
|
$
|
94,476
|
|
We estimate that 879,534 of the non-vested stock options outstanding at December 31, 2019 will ultimately vest.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
The aggregate intrinsic value in the table above represents the total pre-tax difference between the $152.42 closing price of our ordinary shares on December 31, 2019 over the exercise prices of the stock options, multiplied by the number of options outstanding or outstanding and exercisable, as applicable. The aggregate intrinsic value is not recorded for financial accounting purposes and the value changes daily based on the daily changes in the fair market value of ordinary shares.
The total intrinsic value of stock options exercised during the first nine months of fiscal 2020 and fiscal 2019 was $36,939 and $13,773, respectively. Net cash proceeds from the exercise of stock options were $22,958 and $7,534 for the first nine months of fiscal 2020 and fiscal 2019, respectively.
The weighted average grant date fair value of stock option grants was $23.52 and $18.12 for the first nine months of fiscal 2020 and fiscal 2019, respectively.
Stock appreciation rights (“SARS”) carry generally the same terms and vesting requirements as stock options except that they are settled in cash upon exercise and therefore, are classified as liabilities. The fair value of the outstanding SARS as of December 31, 2019 and 2018 was $629 and $692, respectively.
A summary of the non-vested restricted share and share unit activity is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted
Shares
|
|
Number of Restricted Share Units
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Non-vested at March 31, 2019
|
|
676,373
|
|
|
33,219
|
|
|
$
|
80.86
|
|
|
Granted
|
|
156,126
|
|
|
13,081
|
|
|
135.65
|
|
|
Vested
|
|
(214,645
|
)
|
|
(14,999
|
)
|
|
74.63
|
|
|
Forfeited
|
|
(20,620
|
)
|
|
(1,879
|
)
|
|
88.84
|
|
|
Non-vested at December 31, 2019
|
|
597,234
|
|
|
29,422
|
|
|
$
|
97.68
|
|
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 2020 at the time of grant was $17,138.
As of December 31, 2019, there was a total of $48,301 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 2.2 years.
13. Financial and Other Guarantees
We generally offer a limited parts and labor warranty on capital equipment. The specific terms and conditions of those warranties vary depending on the product sold and the countries where we conduct business. We record a liability for the estimated cost of product warranties at the time product revenues are recognized. The amounts we expect to incur on behalf of our Customers for the future estimated cost of these warranties are recorded as a current liability on the accompanying Consolidated Balance Sheets. Factors that affect the amount of our warranty liability include the number and type of installed units, historical and anticipated rates of product failures, and material and service costs per claim. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.
Changes in our warranty liability during the first nine months of fiscal 2020 were as follows:
|
|
|
|
|
|
|
|
|
Warranties
|
|
Balance, March 31, 2019
|
$
|
7,194
|
|
|
Warranties issued during the period
|
8,885
|
|
|
Settlements made during the period
|
(8,951
|
)
|
|
Balance, December 31, 2019
|
$
|
7,128
|
|
14. Derivatives and Hedging
From time to time, we enter into forward contracts to hedge potential foreign currency gains and losses that arise from transactions denominated in foreign currencies, including inter-company transactions. We may also enter into commodity swap contracts to hedge price changes in nickel that impact raw materials included in our cost of revenues. During the third quarter
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
of fiscal 2020, we also held forward foreign currency contracts to hedge a portion of our expected non-U.S. dollar denominated earnings against our reporting currency, the U.S. dollar. These foreign currency exchange contracts will mature during fiscal 2020. We did not elect hedge accounting for these forward foreign currency contracts; however, we may seek to apply hedge accounting in future scenarios. We do not use derivative financial instruments for speculative purposes.
None of these contracts are designated as hedging instruments and do not receive hedge accounting treatment; therefore, changes in their fair value are not deferred but are recognized immediately in the Consolidated Statements of Income. At December 31, 2019, we held foreign currency forward contracts to buy 33.3 million Mexican pesos and 3.6 million Canadian dollars; and to sell 3.6 million euros. At December 31, 2019 we held commodity swap contracts to buy 867.0 thousand pounds of nickel.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
|
Fair Value at
|
|
Fair Value at
|
|
Fair Value at
|
|
Fair Value at
|
|
Balance sheet location
|
|
December 31, 2019
|
|
March 31, 2019
|
|
December 31, 2019
|
|
March 31, 2019
|
|
Prepaid & Other
|
|
$
|
423
|
|
|
$
|
552
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Accrued expenses and other
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
69
|
|
|
$
|
278
|
|
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,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Foreign currency forward contracts
|
|
Selling, general and administrative
|
|
$
|
79
|
|
|
$
|
(488
|
)
|
|
$
|
784
|
|
|
$
|
(100
|
)
|
|
Commodity swap contracts
|
|
Cost of revenues
|
|
$
|
(398
|
)
|
|
$
|
(252
|
)
|
|
$
|
271
|
|
|
$
|
(283
|
)
|
Additionally, we hold our debt in multiple currencies to fund our operations and investments in certain subsidiaries. We designate portions of foreign currency denominated intercompany loans as hedges of portions of net investments in foreign operations. Net debt designated as non-derivative net investment hedging instruments totaled $46,185 at December 31, 2019. 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.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
15. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. We estimate the fair value of financial assets and liabilities using available market information and generally accepted valuation methodologies. The inputs used to measure fair value are classified into three tiers. These tiers include Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring the entity to develop its own assumptions.
The following table shows the fair value of our financial assets and liabilities at December 31, 2019 and March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
Carrying Value
|
|
Quoted Prices
in Active Markets
for Identical Assets
|
|
Significant Other
Observable Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
December 31,
|
March 31,
|
|
December 31,
|
March 31,
|
|
December 31,
|
March 31,
|
|
December 31,
|
March 31,
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
199,230
|
|
$
|
220,633
|
|
|
$
|
199,230
|
|
$
|
220,633
|
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
|
Forward and swap contracts (1)
|
|
423
|
|
552
|
|
|
—
|
|
—
|
|
|
423
|
|
552
|
|
|
—
|
|
—
|
|
|
Equity investments(2)
|
|
12,034
|
|
13,873
|
|
|
12,034
|
|
13,873
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Other investments
|
|
2,539
|
|
2,545
|
|
|
2,539
|
|
2,545
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward and swap contracts (1)
|
|
$
|
69
|
|
$
|
278
|
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
69
|
|
$
|
278
|
|
|
$
|
—
|
|
$
|
—
|
|
|
Deferred compensation plans (2)
|
|
1,728
|
|
1,564
|
|
|
1,728
|
|
1,564
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
Long term debt (3)
|
|
1,136,964
|
|
1,183,227
|
|
|
—
|
|
—
|
|
|
1,160,460
|
|
1,200,558
|
|
|
—
|
|
—
|
|
|
Contingent consideration obligations (4)
|
|
15,272
|
|
5,950
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
15,272
|
|
5,950
|
|
(1) The fair values of forward and swap contracts are based on period-end forward rates and reflect the value of the amount that we would pay or receive for the contracts involving the same notional amounts and maturity dates.
(2) We maintain a frozen domestic non-qualified deferred compensation plan covering certain employees, which allows for the deferral of payment of previously earned compensation for an employee-specified term or until retirement or termination. Amounts deferred can be allocated to various hypothetical investment options (compensation deferrals have been frozen under the plan). We hold investments to satisfy the future obligations of the plan. Employees who made deferrals are entitled to receive distributions of their hypothetical account balances (amounts deferred, together with earnings (losses)). We also hold an investment in the common stock of Servizi Italia, S.p.A, a leading provider of integrated linen washing and outsourced sterile processing services to hospital Customers. Changes in the fair value of these investments are recorded in the "Interest income and miscellaneous expense line" of the Consolidated Statement of Income. During the third quarter and first nine months of fiscal 2020, we recorded a gain of $636 and a loss of $(1,843) respectively, related to these investments. During the third quarter and first nine months of fiscal 2019, we recorded losses of $(2,154) and $(4,663) respectively, related to these investments.
(3) We estimate the fair value of our long-term debt using discounted cash flow analyses, based on our current incremental borrowing rates for similar types of borrowing arrangements.
(4) Contingent consideration obligations arise from business acquisitions. The fair values are based on discounted cash flow analyses reflecting the possible achievement of specified performance measures or events and captures the contractual nature of the contingencies, commercial risk, and the time value of money. Contingent consideration obligations are classified in the consolidated balance sheets as accrued expense (short-term) and other liabilities (long-term), as appropriate based on the contractual payment dates.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis at December 31, 2019 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Contingent Consideration
|
|
Balance at March 31, 2019
|
|
$
|
5,950
|
|
|
Additions
|
|
9,220
|
|
|
Currency translation adjustments
|
|
102
|
|
|
Balance at December 31, 2019
|
|
$
|
15,272
|
|
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
16. Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
Amounts in Accumulated Other Comprehensive Income (Loss) are presented net of the related tax. Currency Translation is not adjusted for income taxes. Changes in our Accumulated Other Comprehensive Income (Loss) balances, net of tax, for the three months ended December 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans (1)
|
|
Currency Translation (2)
|
|
Total Accumulated Other Comprehensive Income (Loss)
|
|
|
Three Months
|
|
Nine Months
|
|
Three Months
|
|
Nine Months
|
|
Three Months
|
|
Nine Months
|
|
Beginning Balance
|
$
|
(5,215
|
)
|
|
$
|
(4,204
|
)
|
|
$
|
(220,502
|
)
|
|
$
|
(155,574
|
)
|
|
$
|
(225,717
|
)
|
|
$
|
(159,778
|
)
|
|
Other comprehensive income before reclassifications
|
195
|
|
|
576
|
|
|
77,299
|
|
|
12,371
|
|
|
77,494
|
|
|
12,947
|
|
|
Amounts reclassified from accumulated other comprehensive (loss)
|
(699
|
)
|
|
(2,091
|
)
|
|
—
|
|
|
—
|
|
|
(699
|
)
|
|
(2,091
|
)
|
|
Net current-period other comprehensive (loss) income
|
(504
|
)
|
|
(1,515
|
)
|
|
77,299
|
|
|
12,371
|
|
|
76,795
|
|
|
10,856
|
|
|
Balance at December 31, 2019
|
$
|
(5,719
|
)
|
|
$
|
(5,719
|
)
|
|
$
|
(143,203
|
)
|
|
$
|
(143,203
|
)
|
|
$
|
(148,922
|
)
|
|
$
|
(148,922
|
)
|
(1) The amortization (gain) of defined benefit pension items is reported in the Interest income and miscellaneous expense line of our Consolidated Statements of Income.
(2) 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 is included in income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Available for Sale Securities
|
|
Defined Benefit Plans (2)
|
|
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
|
$
|
—
|
|
|
$
|
1,970
|
|
|
$
|
(7,565
|
)
|
|
$
|
(6,742
|
)
|
|
$
|
(119,215
|
)
|
|
$
|
16,457
|
|
|
$
|
(126,780
|
)
|
|
$
|
11,685
|
|
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
—
|
|
|
148
|
|
|
452
|
|
|
(39,830
|
)
|
|
(175,502
|
)
|
|
(39,682
|
)
|
|
(175,050
|
)
|
|
Amounts reclassified from accumulated other comprehensive (loss)
|
—
|
|
|
—
|
|
|
(563
|
)
|
|
(1,690
|
)
|
|
—
|
|
|
—
|
|
|
(563
|
)
|
|
(1,690
|
)
|
|
Net current-period other comprehensive (loss)
|
—
|
|
|
—
|
|
|
(415
|
)
|
|
(1,238
|
)
|
|
(39,830
|
)
|
|
(175,502
|
)
|
|
(40,245
|
)
|
|
(176,740
|
)
|
|
Cumulative adjustment to retained earnings (1)
|
—
|
|
|
(1,970
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,970
|
)
|
|
Balance at December 31, 2018
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(7,980
|
)
|
|
$
|
(7,980
|
)
|
|
$
|
(159,045
|
)
|
|
$
|
(159,045
|
)
|
|
$
|
(167,025
|
)
|
|
$
|
(167,025
|
)
|
(1) As a result of the adoption of ASC 2016-01, we recorded a cumulative effect adjustment to our opening fiscal 2019 retained earnings balance that increased retained earnings and decreased accumulated other comprehensive income. Refer to our Annual Report filed on Form 10-K for the year ended March 31, 2019, for more information.
(2) Amortization (gain) of defined benefit pension items is reported in the Interest income and miscellaneous expense line of our 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 is included in income.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollars in thousands, except as noted)
17. Business Acquisitions and Divestitures
Fiscal 2020
During the first nine months of fiscal 2020, we completed several tuck-in acquisitions which continued to expand our product and service offerings in the Healthcare Products, Healthcare Specialty Services and Applied Sterilization Technologies segments. The aggregate purchase price associated with these transactions during the first nine months of fiscal 2020 was approximately $117,259, net of cash acquired and including potential contingent consideration of $9,200 and deferred consideration of $893.
During the first quarter of fiscal 2020, we sold the operations of our Healthcare Specialty Services business that were located in China. We recorded proceeds of $439, net of cash divested, and recognized a pre-tax loss on the sale of $2,365 in the selling, general and administrative expense line of the Consolidated Statements of Income. The business generated annual revenues of approximately $5,000.
Fiscal 2019
During the third quarter of fiscal 2019, we completed a minor purchase to expand our service offerings in the Applied Sterilization Technologies segment. The total purchase price was $13,313.
All acquisitions were financed with both cash on hand and with credit facility borrowings. Purchase price allocations are finalized within a measurement period not to exceed one year from closing. Any provisional adjustments recorded were not material. Acquisition related costs are reported in the selling, general, and administrative expense line of the Consolidated Statements of Income and amounts are not material.
18. Loans Receivable
In connection with an equity investment of $4,955, we agreed to provide a credit facility of up to approximately $10,000 for a term of up to seven years ending in 2025. The loan carries an interest rate of 4% compounded daily and payable annually. Outstanding borrowings under the agreement totaled $7,652 at December 31, 2019 and $7,465 at March 31, 2019.
In connection with the fiscal 2017 divestiture of Synergy Health Netherlands Linen Management Services, we entered into a loan agreement to provide financing of up to €15,000 for a term of up to 15 years. The loan carried an interest rate of 4% for the first four years and 12% thereafter. The loan was renegotiated during the third quarter of fiscal 2020. According to the new terms of the loan agreement, the outstanding balance at October 31, 2019, of €7,300, will be repaid in six equal annual installments beginning on October 18, 2022. The loan carries an interest rate of 4% for the first four years and 8% thereafter. Outstanding borrowings under the agreement totaled $8,175 (or €7,300) at December 31, 2019 and $8,494 (or €7,550) at March 31, 2019.
Amounts for loan receivables as noted above are recorded in the "Other assets" line of our Consolidated balance sheets. Interest income is not material.