STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and 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.
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|
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.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 do not expect this standard to have a material impact on our consolidated financial statements.
|
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|
|
|
|
|
|
|
|
|
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and 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 2019-12 "Income Taxes (Topic 740)"
|
|
December 2019
|
|
The standard provides final guidance that simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance simplifies accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for fiscal years 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
(dollars in thousands, except per share amounts and as noted)
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 $43,851 related to these restructuring actions, of which $31,660 was recorded as restructuring expenses and $12,191 was recorded in cost of revenues, with a total of $31,162, $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 $1,705. 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:
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019 Restructuring Plan
|
Year Ended March 31, 2020
|
Year Ended March 31, 2019
|
|
Severance and other compensation related costs
|
$
|
1,554
|
|
$
|
5,651
|
|
|
Accelerated depreciation and amortization
|
—
|
|
16,194
|
|
|
(Gain) on disposal of asset
|
(1,164
|
)
|
—
|
|
|
Asset impairment
|
—
|
|
4,312
|
|
|
Lease termination costs and other
|
283
|
|
4,830
|
|
|
Product rationalization (1)
|
2,470
|
|
9,721
|
|
|
Total restructuring expenses
|
$
|
3,143
|
|
$
|
40,708
|
|
(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 tables summarize our restructuring liability balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019 Restructuring Plan
|
|
March 31,
2019
|
|
Provisions
|
|
Payments /Impairments (1)
|
|
March 31,
2020
|
|
Severance and termination benefits
|
|
$
|
4,102
|
|
|
$
|
1,554
|
|
|
$
|
(4,659
|
)
|
|
$
|
997
|
|
|
Lease termination obligations and other
|
|
2,029
|
|
|
283
|
|
|
(2,292
|
)
|
|
20
|
|
|
Total
|
|
$
|
6,131
|
|
|
$
|
1,837
|
|
|
$
|
(6,951
|
)
|
|
$
|
1,017
|
|
(1) Certain amounts reported include the impact of foreign currency movements relative to the U.S. dollar.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019 Restructuring Plan
|
|
March 31,
2018
|
|
Provisions
|
|
Payments /Impairments (1)
|
|
March 31,
2019
|
|
Severance and termination benefits
|
|
$
|
—
|
|
|
$
|
5,651
|
|
|
$
|
(1,549
|
)
|
|
$
|
4,102
|
|
|
Lease termination obligations and other
|
|
—
|
|
|
4,830
|
|
|
(2,801
|
)
|
|
2,029
|
|
|
Total
|
|
$
|
—
|
|
—
|
|
$
|
10,481
|
|
—
|
|
$
|
(4,350
|
)
|
—
|
|
$
|
6,131
|
|
(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
(dollars in thousands, except per share amounts and as noted)
3. GOODWILL AND INTANGIBLE ASSETS
Changes to the carrying amount of goodwill for the years ended March 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare Products
Segment
|
|
Healthcare Specialty Services Segment
|
|
Life Sciences
Segment
|
|
Applied Sterilization Technologies Segment
|
|
Total
|
|
Balance at March 31, 2018
|
|
404,674
|
|
|
388,025
|
|
|
148,816
|
|
|
1,492,269
|
|
|
2,433,784
|
|
|
Goodwill acquired or allocated
|
|
(1,202
|
)
|
|
(907
|
)
|
|
—
|
|
|
5,341
|
|
|
3,232
|
|
|
Foreign currency translation adjustments
|
|
(6,188
|
)
|
|
(12,208
|
)
|
|
(1,021
|
)
|
|
(94,671
|
)
|
|
(114,088
|
)
|
|
Balance at March 31, 2019
|
|
$
|
397,284
|
|
|
$
|
374,910
|
|
|
$
|
147,795
|
|
|
$
|
1,402,939
|
|
|
$
|
2,322,928
|
|
|
Goodwill acquired or allocated
|
|
65,222
|
|
|
1,364
|
|
|
—
|
|
|
7,945
|
|
|
74,531
|
|
|
Divestitures
|
|
—
|
|
|
(199
|
)
|
|
—
|
|
|
—
|
|
|
(199
|
)
|
|
Foreign currency translation adjustments
|
|
(3,499
|
)
|
|
(7,816
|
)
|
|
762
|
|
|
(30,622
|
)
|
|
(41,175
|
)
|
|
Balance at March 31, 2020
|
|
$
|
459,007
|
|
|
$
|
368,259
|
|
|
$
|
148,557
|
|
|
$
|
1,380,262
|
|
|
$
|
2,356,085
|
|
See Note 18, titled "Business Acquisitions and Divestitures" for additional information regarding our recent business acquisitions and divestitures.
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 impairment review of goodwill for fiscal years 2020, 2019 and 2018, no indicators of impairment were identified.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
Information regarding our intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
March 31,
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Customer relationships
|
|
$
|
614,162
|
|
|
$
|
227,581
|
|
|
$
|
623,774
|
|
|
$
|
189,752
|
|
|
Non-compete agreements
|
|
4,646
|
|
|
4,012
|
|
|
4,693
|
|
|
3,945
|
|
|
Patents and technology
|
|
259,101
|
|
|
145,457
|
|
|
226,520
|
|
|
126,149
|
|
|
Trademarks and tradenames
|
|
62,543
|
|
|
39,942
|
|
|
63,570
|
|
|
38,850
|
|
|
Supplier relationships
|
|
54,800
|
|
|
12,787
|
|
|
54,800
|
|
|
10,047
|
|
|
Total
|
|
$
|
995,252
|
|
|
$
|
429,779
|
|
|
$
|
973,357
|
|
|
$
|
368,743
|
|
Certain trademarks and tradenames obtained as a result of business combinations are indefinite-lived assets. The approximate carrying value of these assets at March 31, 2020 and March 31, 2019 was $14,250 and $13,000, respectively. We evaluate our indefinite-lived intangible assets annually during the third quarter, or when evidence of potential impairment exists. No impairment was recognized for fiscal year 2020. During the third quarter of fiscal 2019, management adopted a branding strategy that included phasing out the usage of a tradename associated with certain products in the Healthcare Products business segment. As a result, management recorded an impairment charge of $16,249, which is included within the Selling, general, and administrative line of the Consolidated Statements of Income. The remaining fair value of the asset was calculated using an income approach (the relief from royalty method). The remaining fair value was not material and will be amortized over the asset's remaining useful life. Fair value calculated using this approach is classified within Level 3 of the fair value hierarchy and requires several assumptions.
Total amortization expense for intangible assets was $74,528, $98,747, and $70,195 for the years ended March 31, 2020, 2019, and 2018, respectively. Based upon the current amount of intangible assets subject to amortization, the amortization expense for each of the five succeeding fiscal years is estimated to be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
Estimated amortization expense
|
|
$
|
71,049
|
|
|
$
|
68,393
|
|
|
$
|
62,808
|
|
|
$
|
56,549
|
|
|
$
|
54,772
|
|
The estimated annual amortization expense presented in the preceding table has been calculated based upon March 31, 2020 currency exchange rates.
4. INVENTORIES, NET
Inventories, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2020
|
|
2019
|
|
Raw materials
|
|
$
|
94,321
|
|
|
$
|
83,009
|
|
|
Work in process
|
|
35,643
|
|
|
30,694
|
|
|
Finished goods
|
|
151,381
|
|
|
131,051
|
|
|
LIFO reserve
|
|
(16,937
|
)
|
|
(16,757
|
)
|
|
Reserve for excess and obsolete inventory
|
|
(16,149
|
)
|
|
(19,754
|
)
|
|
Inventories, net
|
|
$
|
248,259
|
|
|
$
|
208,243
|
|
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
5. PROPERTY, PLANT AND EQUIPMENT
Information related to the major categories of our depreciable assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2020
|
|
2019
|
|
Land and land improvements (1)
|
|
$
|
65,994
|
|
|
$
|
63,522
|
|
|
Buildings and leasehold improvements
|
|
531,267
|
|
|
480,359
|
|
|
Machinery and equipment
|
|
682,488
|
|
|
656,956
|
|
|
Information systems
|
|
181,112
|
|
|
169,711
|
|
|
Radioisotope
|
|
508,593
|
|
|
483,080
|
|
|
Construction in progress (1)
|
|
159,731
|
|
|
133,689
|
|
|
Total property, plant, and equipment
|
|
2,129,185
|
|
|
1,987,317
|
|
|
Less: accumulated depreciation and depletion
|
|
(1,017,330
|
)
|
|
(955,735
|
)
|
|
Property, plant, and equipment, net
|
|
$
|
1,111,855
|
|
|
$
|
1,031,582
|
|
(1) Land is not depreciated. Construction in progress is not depreciated until placed in service.
Depreciation and depletion expense were $122,707, $127,174 and $108,137, for the years ended March 31, 2020, 2019, and 2018, respectively.
Asset Retirement Obligations
We provide contract sterilization services including Gamma irradiation which utilizes cobalt-60 in the form of cobalt pencils. We have incurred asset retirement obligations (ARO) associated with the future disposal of these assets once depleted. Recognition of ARO includes: the present value of a liability and offsetting asset, the subsequent accretion of that liability and depletion of the asset, and the periodic review of the ARO liability estimates and discount rates used in the analysis.
The following table summarizes the activity in the liability for asset retirement obligations.
|
|
|
|
|
|
|
|
|
Asset Retirement Obligations
|
|
Balance at March 31, 2018
|
$
|
11,639
|
|
|
Liabilities incurred during the period
|
1,033
|
|
|
Accretion expense and change in estimate
|
385
|
|
|
Foreign currency and other
|
(671
|
)
|
|
Balance at March 31, 2019
|
$
|
12,386
|
|
|
Liabilities incurred during the period
|
94
|
|
|
Liabilities settled during the period
|
(168
|
)
|
|
Accretion expense and change in estimate
|
453
|
|
|
Foreign currency and other
|
(251
|
)
|
|
Balance at March 31, 2020
|
$
|
12,514
|
|
6. DEBT
Indebtedness as of March 31, 2020 and 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Credit Agreement
|
|
$
|
275,449
|
|
|
$
|
301,846
|
|
|
Private Placement
|
|
878,409
|
|
|
884,967
|
|
|
Deferred financing fees
|
|
(3,337
|
)
|
|
(3,619
|
)
|
|
Other
|
|
—
|
|
|
33
|
|
|
Total long term debt
|
|
$
|
1,150,521
|
|
|
$
|
1,183,227
|
|
On March 23, 2018, STERIS UK and certain of its subsidiaries entered into a Credit Agreement (the "Credit Agreement") with various financial institutions as lenders, and JPMorgan Chase Bank, N.A., as Administrative Agent. STERIS Ireland
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
subsequently became a borrower and guarantor under the Credit Agreement. The Credit Agreement replaced a bank credit facility dated March 31, 2015. The Credit Agreement provides up to $1,000,000 of credit, in the form of a revolver facility, which may be utilized for revolving credit borrowings, swing line borrowings and letters of credit, with sublimits for swing line borrowings and letters of credit. The revolver facility may be increased in specified circumstances by up to $500,000. The Credit Agreement will mature on March 23, 2023, and all unpaid borrowings, together with accrued and unpaid interest thereon, are repayable on that date. The Credit Agreement contains leverage and interest coverage covenants. Borrowings may be taken in U.S. dollars, euros, and pounds sterling and certain other specified currencies and bear interest at our option based upon either the Base Rate or the Eurocurrency Rate, plus the Applicable Margin in effect from time to time under the Credit Agreement. The Applicable Margin is determined based on the ratio of Consolidated Total Debt to Consolidated EBITDA (as such terms are defined in the Credit Agreement). Interest on Base Rate Advances is payable quarterly in arrears and interest on Eurocurrency Rate Advances is payable at the end of the relevant interest period therefor, but in no event less frequently than every three months. Borrowings at closing were used to repay outstanding balances of debt outstanding under the former bank credit facility dated March 31, 2015 that was scheduled to mature on March 31, 2020 and for other general corporate purposes. The Credit Agreement was amended in March 2019, in connection with the Redomiciliation to permit the Redomiciliation. The amendments did not effect any material changes in the terms of the Credit Agreement regarding borrowings or the issuance of letters of credit.
As of March 31, 2020 a total of $275,449 of Credit Agreement and Swing Line Facility borrowings were outstanding under the Credit Agreement, based on currency exchange rates as of March 31, 2020.
Our outstanding Senior Notes at March 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable Note Purchase Agreement
|
|
Maturity Date
|
|
U.S. Dollar Value at March 31, 2020
|
|
U.S. Dollar Value at March 31, 2019
|
|
$35,000 Senior notes at 6.43%
|
|
2008 Private Placement
|
|
August 2020
|
|
35,000
|
|
|
35,000
|
|
|
$91,000 Senior notes at 3.20%
|
|
2012 Private Placement
|
|
December 2022
|
|
91,000
|
|
|
91,000
|
|
|
$80,000 Senior notes at 3.35%
|
|
2012 Private Placement
|
|
December 2024
|
|
80,000
|
|
|
80,000
|
|
|
$25,000 Senior notes at 3.55%
|
|
2012 Private Placement
|
|
December 2027
|
|
25,000
|
|
|
25,000
|
|
|
$125,000 Senior notes at 3.45%
|
|
2015 Private Placement
|
|
May 2025
|
|
125,000
|
|
|
125,000
|
|
|
$125,000 Senior notes at 3.55%
|
|
2015 Private Placement
|
|
May 2027
|
|
125,000
|
|
|
125,000
|
|
|
$100,000 Senior notes at 3.70%
|
|
2015 Private Placement
|
|
May 2030
|
|
100,000
|
|
|
100,000
|
|
|
$50,000 Senior notes at 3.93%
|
|
2017 Private Placement
|
|
February 2027
|
|
50,000
|
|
|
50,000
|
|
|
€60,000 Senior notes at 1.86%
|
|
2017 Private Placement
|
|
February 2027
|
|
66,342
|
|
|
67,352
|
|
|
$45,000 Senior notes at 4.03%
|
|
2017 Private Placement
|
|
February 2029
|
|
45,000
|
|
|
45,000
|
|
|
€20,000 Senior notes at 2.04%
|
|
2017 Private Placement
|
|
February 2029
|
|
22,114
|
|
|
22,450
|
|
|
£45,000 Senior notes at 3.04%
|
|
2017 Private Placement
|
|
February 2029
|
|
55,767
|
|
|
58,702
|
|
|
€19,000 Senior notes at 2.30%
|
|
2017 Private Placement
|
|
February 2032
|
|
21,008
|
|
|
21,328
|
|
|
£30,000 Senior notes at 3.17%
|
|
2017 Private Placement
|
|
February 2032
|
|
37,178
|
|
|
39,135
|
|
|
Total Senior Notes
|
|
|
|
|
|
$
|
878,409
|
|
|
$
|
884,967
|
|
On February 27, 2017, STERIS UK issued and sold an aggregate principal amount of $95,000, €99,000, and £75,000, of senior notes in a private placement to certain institutional investors in an offering that was exempt from the registration requirements of the Securities Act of 1933. These notes have maturities of between 10 years and 15 years from the issue date. The agreement governing these notes contains leverage and interest coverage covenants.
On May 15, 2015, STERIS Corporation issued and sold $350,000 of senior notes, in a private placement to certain institutional investors in an offering that was exempt from the registration requirements of the Securities Act of 1933. These notes have maturities of 10 years to 15 years from the issue date. The agreement governing these notes contains leverage and interest coverage covenants.
The agreements governing certain senior notes issued and sold in February 2013, December 2012, and August 2008, were amended and restated in their entirety on March 31, 2015. All of these notes were issued and sold in private placements to
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
certain institutional investors in offerings that were exempt from the registration requirements of the Securities Act of 1933. The amended and restated agreements, which have been consolidated into a single agreement for the 2013 and 2012 notes, and a separate single agreement for the 2008 notes, contain leverage and interest coverage covenants.
All of the note agreements were amended in March 2019, in connection with the Redomiciliation. The amendments waived certain repurchase rights of the note holders and increased the size of certain baskets to more closely align with Credit Agreement baskets.
At March 31, 2020, we were in compliance with all financial covenants associated with our indebtedness.
The combined annual aggregate amount of maturities of our outstanding debt by fiscal year is as follows:
|
|
|
|
|
|
|
|
2021 (1)
|
$
|
35,000
|
|
|
2022
|
—
|
|
|
2023
|
366,449
|
|
|
2024
|
—
|
|
|
2025 and thereafter
|
752,409
|
|
|
Total
|
$
|
1,153,858
|
|
(1) This amount represents a senior note that matures in August 2020. In accordance with ASU 470-10-45, we have presented the note as a long-term liability based on our intention to refinance the note on a long-term basis under our credit facility.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
7. ADDITIONAL CONSOLIDATED BALANCE SHEET INFORMATION
Additional information related to our Consolidated Balance Sheet is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2020
|
|
2019
|
|
Accrued payroll and other related liabilities:
|
|
|
|
|
|
Compensation and related items
|
|
$
|
42,205
|
|
|
$
|
37,251
|
|
|
Accrued vacation/paid time off
|
|
9,917
|
|
|
10,191
|
|
|
Accrued bonuses
|
|
53,041
|
|
|
40,194
|
|
|
Accrued employee commissions
|
|
19,298
|
|
|
17,854
|
|
|
Other post-retirement benefits obligations-current portion
|
|
1,488
|
|
|
1,633
|
|
|
Other employee benefit plans' obligations-current portion
|
|
2,312
|
|
|
1,935
|
|
|
Total accrued payroll and other related liabilities
|
|
$
|
128,261
|
|
|
$
|
109,058
|
|
|
Accrued expenses and other:
|
|
|
|
|
|
Deferred revenues
|
|
$
|
53,299
|
|
|
$
|
55,333
|
|
|
Service liabilities
|
|
47,505
|
|
|
42,101
|
|
|
Self-insured and related risk reserves-current portion
|
|
7,342
|
|
|
6,537
|
|
|
Accrued dealer commissions
|
|
15,827
|
|
|
15,283
|
|
|
Accrued warranty
|
|
7,381
|
|
|
7,194
|
|
|
Asset retirement obligation-current portion
|
|
2,671
|
|
|
2,656
|
|
|
Other
|
|
58,158
|
|
|
58,661
|
|
|
Total accrued expenses and other
|
|
$
|
192,183
|
|
|
$
|
187,765
|
|
|
Other liabilities:
|
|
|
|
|
|
Self-insured risk reserves-long-term portion
|
|
$
|
17,452
|
|
|
$
|
14,445
|
|
|
Other post-retirement benefits obligations-long-term portion
|
|
9,880
|
|
|
10,918
|
|
|
Defined benefit pension plans obligations-long-term portion
|
|
10,987
|
|
|
16,168
|
|
|
Other employee benefit plans obligations-long-term portion
|
|
2,333
|
|
|
4,711
|
|
|
Accrued long-term income taxes
|
|
11,959
|
|
|
13,515
|
|
|
Asset retirement obligation-long-term portion
|
|
9,843
|
|
|
9,730
|
|
|
Contingent consideration obligations- long term portion
|
|
15,358
|
|
|
5,950
|
|
|
Other
|
|
12,534
|
|
|
12,375
|
|
|
Total other liabilities
|
|
$
|
90,346
|
|
|
$
|
87,812
|
|
8. INCOME TAXES
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 have continued to monitor these as they are published. While none have resulted in material adverse impacts through fiscal 2020, there are certain items, which were not yet considered law as of March 31, 2020, that if finalized as proposed, could result in an adverse impact on our consolidated financial statements. Specifically, full retroactive application to April 1, 2019 of certain of the regulations relating to §267A, would require recognition of income tax expense up to $15,000 related to the period April 1, 2019 through December 4, 2019 when we restructured certain of our intercompany financing arrangements. This potential impact contains significant uncertainty and
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
could be impacted by various factors, including any differences between the proposed and finalized regulations, issued in April 2020, and their retroactive application.
Income from continuing operations before income taxes was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
2020
|
|
2019
|
|
2018
|
|
United States operations
|
|
$
|
325,522
|
|
|
$
|
235,405
|
|
|
$
|
203,872
|
|
|
Ireland operations
|
|
29,543
|
|
|
13,693
|
|
|
11,837
|
|
|
Other locations operations
|
|
143,616
|
|
|
120,372
|
|
|
139,273
|
|
|
|
|
$
|
498,681
|
|
|
$
|
369,470
|
|
|
$
|
354,982
|
|
The components of the provision for income taxes related to income from continuing operations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
2020
|
|
2019
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
|
United States federal
|
|
$
|
42,032
|
|
|
$
|
29,943
|
|
|
$
|
47,728
|
|
|
United States state and local
|
|
9,971
|
|
|
12,484
|
|
|
7,727
|
|
|
Ireland
|
|
5,036
|
|
|
2,627
|
|
|
2,596
|
|
|
Other locations
|
|
24,600
|
|
|
26,824
|
|
|
26,742
|
|
|
|
|
81,639
|
|
|
71,878
|
|
|
84,793
|
|
|
Deferred:
|
|
|
|
|
|
|
|
United States federal
|
|
10,073
|
|
|
5,775
|
|
|
(15,728
|
)
|
|
United States state and local
|
|
2,363
|
|
|
2,836
|
|
|
2,656
|
|
|
Ireland
|
|
(899
|
)
|
|
(546
|
)
|
|
(280
|
)
|
|
Other locations
|
|
(2,300
|
)
|
|
(15,549
|
)
|
|
(8,081
|
)
|
|
|
|
9,237
|
|
|
(7,484
|
)
|
|
(21,433
|
)
|
|
Total Provision for Income Taxes
|
|
$
|
90,876
|
|
|
$
|
64,394
|
|
|
$
|
63,360
|
|
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
The total provision for income taxes can be reconciled to the tax computed at the Ireland statutory tax rate for 2020 and 2019, and the United Kingdom statutory rate for 2018 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
2020
|
|
2019
|
|
2018
|
|
National statutory tax rate
|
|
12.5
|
%
|
|
12.5
|
%
|
|
19.0
|
%
|
|
Increase (decrease) in accruals for uncertain tax positions
|
|
(0.3
|
)%
|
|
—
|
%
|
|
0.1
|
%
|
|
U.S. state and local taxes, net of federal income tax benefit
|
|
2.0
|
%
|
|
3.1
|
%
|
|
2.3
|
%
|
|
Increase in valuation allowances
|
|
0.5
|
%
|
|
0.4
|
%
|
|
0.1
|
%
|
|
U.S. research and development credit
|
|
(0.5
|
)%
|
|
(0.6
|
)%
|
|
(0.5
|
)%
|
|
U.S. foreign income tax credit
|
|
(0.6
|
)%
|
|
(0.2
|
)%
|
|
(0.2
|
)%
|
|
Difference in non-Ireland tax rates
|
|
6.9
|
%
|
|
4.5
|
%
|
|
—
|
%
|
|
Difference in non-United Kingdom tax rates
|
|
—
|
%
|
|
—
|
%
|
|
4.1
|
%
|
|
U.S. manufacturing deduction
|
|
—
|
%
|
|
—
|
%
|
|
(0.8
|
)%
|
|
Excess tax benefit for equity compensation
|
|
(2.8
|
)%
|
|
(2.2
|
)%
|
|
(1.8
|
)%
|
|
Tax rate changes on deferred tax assets and liabilities
|
|
0.1
|
%
|
|
(0.6
|
)%
|
|
(10.3
|
)%
|
|
U.S. transition tax on foreign earnings
|
|
—
|
%
|
|
(0.3
|
)%
|
|
4.9
|
%
|
|
U.S. tax reform impact, GILTI and FDII
|
|
0.1
|
%
|
|
0.3
|
%
|
|
—
|
%
|
|
Acquisitions and divestitures
|
|
—
|
%
|
|
—
|
%
|
|
0.5
|
%
|
|
Capitalized acquisition, redomiciliation costs
|
|
0.1
|
%
|
|
0.5
|
%
|
|
—
|
%
|
|
All other, net
|
|
0.2
|
%
|
|
—
|
%
|
|
0.4
|
%
|
|
Total Provision for Income Taxes
|
|
18.2
|
%
|
|
17.4
|
%
|
|
17.8
|
%
|
Unrecognized Tax Benefits. We classify uncertain tax positions and related interest and penalties as long-term liabilities within “Other liabilities” in our accompanying Consolidated Balance Sheets, unless they are expected to be paid within 12 months, in which case, the uncertain tax positions would be classified as current liabilities within “Accrued income taxes.” We recognize interest and penalties related to unrecognized tax benefits within “Income tax expense” in our accompanying Consolidated Statements of Income.
A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Unrecognized Tax Benefits Balance at April 1
|
|
$
|
2,314
|
|
|
$
|
2,500
|
|
|
Increases for tax provisions of current year
|
|
176
|
|
|
178
|
|
|
Decreases for tax provisions of prior year
|
|
(1,570
|
)
|
|
(186
|
)
|
|
Other, including currency translation
|
|
(45
|
)
|
|
(178
|
)
|
|
Unrecognized Tax Benefits Balance at March 31
|
|
$
|
875
|
|
|
$
|
2,314
|
|
We recognized interest and penalties related to uncertain tax positions in the provision for income taxes. As of March 31, 2020, and 2019 we had $243 and $360 accrued for interest and penalties, respectively. If all unrecognized tax benefits were recognized, the net impact on the provision for income tax expense would be $1,118. The decrease in unrecognized tax benefits from prior year is due to the release of expired positions. It is reasonably possible that during the next 12 months, there will be no material reductions in unrecognized tax benefits as a result of the expiration of various statutes of limitations or other matters.
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.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
In May 2019, we received two notices of proposed tax adjustment from the U.S. Internal Revenue Service (the “IRS”) regarding the deductibility of interest paid on certain intercompany debt. The notices relate to fiscal years 2016 and 2017. In September 2019, we received another notice of proposed adjustment for the same issue, for the 2018 fiscal year. The IRS adjustments would result in a cumulative tax liability of approximately $40,000. Notices have not been received for subsequent periods. We are contesting the IRS’s assertions, and intend to pursue available remedies such as appeals and litigation, if necessary. We have not established reserves related to these notices. An unfavorable outcome is not expected to have a material adverse impact on our consolidated financial position but could be material to our consolidated results of operations and cash flows for any one period.
We estimate that the tax benefit from our Costa Rican Tax Holiday is $1,900 (or $0.02 per fully diluted share), annually. The Tax Holiday runs fully exempt, from income tax, through 2025 and partially exempt through 2029.
Deferred Taxes. The significant components of the deferred tax assets and liabilities recorded in our accompanying balance sheets at March 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2020
|
|
2019
|
|
Deferred Tax Assets:
|
|
|
|
|
|
Post-retirement benefit accrual
|
|
$
|
2,871
|
|
|
$
|
3,142
|
|
|
Compensation
|
|
12,560
|
|
|
14,275
|
|
|
Net operating loss carryforwards
|
|
16,149
|
|
|
19,195
|
|
|
Accrued expenses
|
|
5,490
|
|
|
4,858
|
|
|
Insurance
|
|
3,620
|
|
|
3,187
|
|
|
Deferred income
|
|
11,316
|
|
|
7,509
|
|
|
Bad debt
|
|
1,820
|
|
|
1,386
|
|
|
Pension
|
|
2,273
|
|
|
3,364
|
|
|
Operating leases (1)
|
|
28,945
|
|
|
—
|
|
|
Other
|
|
6,024
|
|
|
7,707
|
|
|
Deferred Tax Assets
|
|
91,068
|
|
|
64,623
|
|
|
Less: Valuation allowance
|
|
13,891
|
|
|
13,478
|
|
|
Total Deferred Tax Assets
|
|
77,177
|
|
|
51,145
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
Depreciation and depletion
|
|
68,179
|
|
|
61,060
|
|
|
Operating leases (1)
|
|
29,268
|
|
|
—
|
|
|
Intangibles
|
|
129,951
|
|
|
128,479
|
|
|
Other
|
|
2,078
|
|
|
2,197
|
|
|
Total Deferred Tax Liabilities
|
|
229,476
|
|
|
191,736
|
|
|
Net Deferred Tax Assets (Liabilities)
|
|
$
|
(152,299
|
)
|
|
$
|
(140,591
|
)
|
(1) For more information regarding our operating leases, see Note 10 titled, "Commitments and Contingencies".
At March 31, 2020, we had U.S. federal operating loss carryforwards of $10,942, which remain subject to a 20 year carryforward period. Additionally, we had non-U.S. operating loss carry forwards of $41,450. Although the majority of the non-U.S. carryforwards have indefinite expiration periods, those carryforwards that have definite expiration periods will expire if unused between fiscal years 2021 and 2041. In addition, we have recorded pre-valuation allowance tax benefits of $2,042 related to state operating loss carryforwards. If unused, these state operating loss carryforwards will expire between fiscal years 2021 and 2040. At March 31, 2020, we had $2,547 of tax credit carryforwards. These credit carryforwards can be used through fiscal 2030.
We review the need for a valuation allowance against our deferred tax assets. A valuation allowance of $13,891 has been applied to a portion of the net deferred tax assets because we do not believe it is more-likely-than-not that we will receive future benefit. The valuation allowance increased during fiscal 2020 by $413.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
Other than the tax expense recorded for the one-time transition tax on unremitted earnings of non-US subsidiaries, no additional provision has been made for income taxes on undistributed earnings of foreign subsidiaries as the Company’s position is that these amounts continue to be indefinitely reinvested. The amount of undistributed earnings of subsidiaries was approximately $1,600,000 at March 31, 2020. It is not practicable to estimate the additional income taxes and applicable withholding taxes that would be payable on the remittance of such undistributed earnings.
In October 2015, the Organization for Economic Cooperation and Development (OECD), in conjunction with the G20, finalized broad-based international tax policy guidelines that involve transfer pricing and other international tax subjects. While some member jurisdictions automatically adopt the new OECD guidelines, most member countries can adopt the guidelines only by new law or regulations. We are currently adopting processes to comply with the reporting requirements specified by the guidelines and are evaluating the other parts of the guidelines.
9. BENEFIT PLANS
In the United States, we sponsor an unfunded post-retirement welfare benefits plan for two groups of United States retirees. Benefits under this plan include retiree life insurance and retiree medical insurance, 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.
We sponsor several defined benefit pension schemes outside the United States: two in the UK, one in the Netherlands, two in Germany, and one in Switzerland. The Synergy Health plc Retirement Benefit Scheme is a defined benefit (final salary) funded pension scheme. 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 unfunded defined pension schemes and are closed to new entrants. The Synergy Daniken Scheme is a defined benefit funded pension scheme. As a result of our fiscal 2018 acquisition of Harwell Dosimeters Ltd, we also sponsor in the Harwell Dosimeters Ltd Retirement Benefits Scheme which is a defined benefit funded pension scheme.
We recognize the funded status of our defined benefit pension and post-retirement benefit plans in our Consolidated Balance Sheets, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The funded status is measured as of March 31 each year and is calculated as the difference between the fair value of plan assets and the benefit obligation (which is the projected benefit obligation for pension plans and the accumulated post-retirement benefit obligation for post-retirement benefit plans). Accumulated comprehensive income (loss) represents the net unrecognized actuarial losses and unrecognized prior service cost. These amounts will be recognized in net periodic benefit cost as they are amortized. We will recognize future changes to the funded status of these plans in the year the change occurs, through other comprehensive income.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
Obligations and Funded Status. The following table reconciles the funded status of the defined benefit pension plans and the other post-retirement benefits plan to the amounts recorded on our Consolidated Balance Sheets at March 31, 2020 and 2019, respectively. Benefit obligation balances presented in the following table reflect the projected benefit obligations for our defined benefit pension plans and the accumulated other post-retirement benefit obligation for our post-retirement benefits plan. The measurement date of our defined benefit pension plans and other post-retirement benefits plan is March 31, for both periods presented.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Defined Benefit Pension Plans
|
|
Other
Post-Retirement
Benefits Plan
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Change in Benefit Obligations:
|
|
|
|
|
|
|
|
|
Benefit Obligations at Beginning of Year
|
$
|
133,672
|
|
|
$
|
148,848
|
|
|
$
|
12,551
|
|
|
$
|
14,100
|
|
|
Service cost
|
1,380
|
|
|
2,394
|
|
|
—
|
|
|
—
|
|
|
Prior service cost
|
—
|
|
|
831
|
|
|
—
|
|
|
—
|
|
|
Interest cost
|
2,955
|
|
|
3,255
|
|
|
408
|
|
|
457
|
|
|
Actuarial loss (gain)
|
(3,736
|
)
|
|
(4,402
|
)
|
|
181
|
|
|
(106
|
)
|
|
Benefits and expenses
|
(6,466
|
)
|
|
(6,150
|
)
|
|
(1,772
|
)
|
|
(1,900
|
)
|
|
Employee contributions
|
1,046
|
|
|
743
|
|
|
—
|
|
|
—
|
|
|
Impact of foreign currency exchange rate changes
|
(5,661
|
)
|
|
(11,847
|
)
|
|
—
|
|
|
—
|
|
|
Benefit Obligations at End of Year
|
123,190
|
|
|
133,672
|
|
|
11,368
|
|
|
12,551
|
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
Fair Value of Plan Assets at Beginning of Year
|
117,504
|
|
|
119,441
|
|
|
—
|
|
|
—
|
|
|
Actual return on plan assets
|
228
|
|
|
6,543
|
|
|
—
|
|
|
—
|
|
|
Employer contributions
|
5,071
|
|
|
5,005
|
|
|
1,772
|
|
|
1,900
|
|
|
Employee contributions
|
1,045
|
|
|
742
|
|
|
—
|
|
|
—
|
|
|
Benefits and expenses paid
|
(6,466
|
)
|
|
(6,150
|
)
|
|
(1,772
|
)
|
|
(1,900
|
)
|
|
Impact of foreign currency exchange rate changes
|
(5,179
|
)
|
|
(8,077
|
)
|
|
—
|
|
|
—
|
|
|
Fair Value of Plan Assets at End of Year
|
112,203
|
|
|
117,504
|
|
|
—
|
|
|
—
|
|
|
Funded Status of the Plans
|
$
|
(10,987
|
)
|
|
$
|
(16,168
|
)
|
|
$
|
(11,368
|
)
|
|
$
|
(12,551
|
)
|
Amounts recognized in the consolidated balance sheets consist of the following:
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Defined Benefit Pension Plans
|
|
Other Post-Retirement Benefits Plan
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Current liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,488
|
)
|
|
$
|
(1,633
|
)
|
|
Noncurrent liabilities
|
|
(10,987
|
)
|
|
(16,168
|
)
|
|
(9,880
|
)
|
|
(10,918
|
)
|
|
|
|
$
|
(10,987
|
)
|
|
$
|
(16,168
|
)
|
|
$
|
(11,368
|
)
|
|
$
|
(12,551
|
)
|
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
The pre-tax amount of unrecognized actuarial net loss and unamortized prior service cost included in accumulated other comprehensive (loss) income at March 31, 2020, was approximately $14,405 and $7,463, respectively. During fiscal 2021, we will amortize the following pre-tax amounts from accumulated other comprehensive income:
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|
|
|
|
|
|
|
|
Defined Benefit Pension Plans
|
|
Other Post-Retirement
Benefits Plan
|
|
Actuarial loss
|
|
$
|
20
|
|
|
$
|
482
|
|
|
Prior Service Cost
|
|
69
|
|
|
(3,263
|
)
|
Defined benefit plans with an accumulated benefit obligation and projected benefit obligation exceeding the fair value of plan assets had the following plan assets and obligations at March 31, 2020 and 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Defined Benefit Pension Plans
|
|
|
|
2020
|
|
2019
|
|
Aggregate fair value of plan assets
|
|
$
|
112,203
|
|
|
$
|
117,504
|
|
|
Aggregate accumulated benefit obligations
|
|
120,084
|
|
|
130,669
|
|
|
Aggregate projected benefit obligations
|
|
123,190
|
|
|
132,672
|
|
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income. Components of the annual net periodic benefit cost of our defined benefit pension plans and our other post-retirement benefits plan were as follows:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Defined Benefit Pension Plans
|
|
Other Post-Retirement Benefits Plan
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
Service cost
|
|
$
|
1,380
|
|
|
$
|
2,394
|
|
|
$
|
2,402
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
|
2,876
|
|
|
3,139
|
|
|
3,262
|
|
|
409
|
|
|
457
|
|
|
519
|
|
|
Expected return on plan assets
|
|
(4,735
|
)
|
|
(4,930
|
)
|
|
(4,835
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Prior service cost recognition
|
|
69
|
|
|
51
|
|
|
—
|
|
|
(3,263
|
)
|
|
(3,263
|
)
|
|
(3,263
|
)
|
|
Net amortization and deferral
|
|
9
|
|
|
474
|
|
|
126
|
|
|
482
|
|
|
552
|
|
|
648
|
|
|
Net periodic benefit (credit) cost
|
|
$
|
(401
|
)
|
|
$
|
1,128
|
|
|
$
|
955
|
|
|
$
|
(2,372
|
)
|
|
$
|
(2,254
|
)
|
|
$
|
(2,096
|
)
|
|
Recognized in other comprehensive loss (income) before tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (gain) occurring during year
|
|
$
|
890
|
|
|
$
|
(6,545
|
)
|
|
$
|
(697
|
)
|
|
$
|
(181
|
)
|
|
$
|
106
|
|
|
$
|
501
|
|
|
Amortization of prior service credit
|
|
(78
|
)
|
|
781
|
|
|
—
|
|
|
3,263
|
|
|
3,263
|
|
|
3,263
|
|
|
Amortization of net loss
|
|
—
|
|
|
(468
|
)
|
|
(126
|
)
|
|
(482
|
)
|
|
(552
|
)
|
|
(648
|
)
|
|
Total recognized in other comprehensive loss (income)
|
|
812
|
|
|
(6,232
|
)
|
|
(823
|
)
|
|
2,600
|
|
|
2,817
|
|
|
3,116
|
|
|
Total recognized in total benefits cost and other comprehensive loss (income)
|
|
$
|
411
|
|
|
$
|
(5,104
|
)
|
|
$
|
132
|
|
|
$
|
228
|
|
|
$
|
563
|
|
|
$
|
1,020
|
|
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
Assumptions Used in Calculating Benefit Obligations and Net Periodic Benefit Cost. The following table presents significant assumptions used to determine the projected benefit obligations at March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Discount Rate:
|
|
|
|
|
|
Synergy Health plc Retirement Benefits Scheme
|
|
2.40
|
%
|
|
2.50
|
%
|
|
Isotron BV Pension Plan
|
|
1.60
|
%
|
|
1.20
|
%
|
|
Synergy Health Daniken AG
|
|
0.20
|
%
|
|
0.85
|
%
|
|
Synergy Health Radeberg
|
|
1.60
|
%
|
|
1.60
|
%
|
|
Synergy Health Allershausen
|
|
0.50
|
%
|
|
1.60
|
%
|
|
Harwell Dosimeters Ltd Retirement Benefits Scheme
|
|
2.45
|
%
|
|
2.35
|
%
|
|
Other post-retirement plan
|
|
3.00
|
%
|
|
3.50
|
%
|
The following table presents significant assumptions used to determine the net periodic benefit costs for the years ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Discount Rate:
|
|
|
|
|
|
|
|
Synergy Health plc Retirement Benefits Scheme
|
|
2.50
|
%
|
|
2.50
|
%
|
|
2.60
|
%
|
|
Isotron BV Pension Plan
|
|
1.20
|
%
|
|
1.60
|
%
|
|
1.60
|
%
|
|
Synergy Health Daniken AG
|
|
0.20
|
%
|
|
0.95
|
%
|
|
0.65
|
%
|
|
Synergy Health Radeberg
|
|
1.60
|
%
|
|
1.60
|
%
|
|
1.50
|
%
|
|
Synergy Health Allershausen
|
|
1.75
|
%
|
|
1.60
|
%
|
|
1.50
|
%
|
|
Harwell Dosimeters Ltd Retirement Benefits Scheme
|
|
2.45
|
%
|
|
2.55
|
%
|
|
2.55
|
%
|
|
Other post-retirement plan
|
|
3.50
|
%
|
|
3.50
|
%
|
|
3.50
|
%
|
|
Expected Return on Plan Assets:
|
|
|
|
|
|
|
|
Synergy Health plc Retirement Benefits Scheme
|
|
4.80
|
%
|
|
5.02
|
%
|
|
4.97
|
%
|
|
Isotron BV Pension Plan
|
|
1.20
|
%
|
|
1.60
|
%
|
|
1.60
|
%
|
|
Synergy Health Daniken AG
|
|
0.65
|
%
|
|
1.20
|
%
|
|
1.40
|
%
|
The net periodic benefit cost and the actuarial present value of projected benefit obligations are based upon assumptions that we review on an annual basis. These assumptions may be revised annually based upon an evaluation of long-term trends, as well as market conditions that may have an impact on the cost of providing benefits.
We develop our expected long-term rate of return on plan assets assumptions by evaluating input from third-party professional advisers, taking into consideration the asset allocation of the portfolios and the long-term asset class return expectations.
We develop our discount rate assumptions by evaluating input from third-party professional advisers, taking into consideration the current yield on country specific investment grade long-term bonds which provide for similar cash flow streams as our projected obligations.
We have made assumptions regarding healthcare costs in computing our other post-retirement benefit obligation. The assumed rates of increase generally decline ratably over a five-year period from the assumed current year healthcare cost trend rate to the assumed long-term healthcare cost trend rate noted below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Healthcare cost trend rate – medical
|
|
6.75
|
%
|
|
6.75
|
%
|
|
7.00
|
%
|
|
Healthcare cost trend rate – prescription drug
|
|
6.75
|
%
|
|
6.75
|
%
|
|
7.00
|
%
|
|
Long-term healthcare cost trend rate
|
|
4.50
|
%
|
|
4.50
|
%
|
|
4.50
|
%
|
To determine the healthcare cost trend rates, we evaluate a combination of information, including ongoing claims cost monitoring, annual statistical analyses of claims data, reconciliation of forecasted claims against actual claims, review of trend
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
assumptions of other plan sponsors and national health trends, and adjustments for plan design changes, workforce changes, and changes in plan participant behavior.
A one-percentage-point change in assumed healthcare cost trend rates (including medical, prescription drug, and long-term rates) would have had the following effect on our other post-retirement benefit obligation at March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-Percentage Point
|
|
|
|
Increase
|
|
Decrease
|
|
Effect on total service and interest cost components
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Effect on other post-retirement benefit obligation
|
|
7
|
|
|
(6
|
)
|
Plan Assets. The investment policies for our plans are generally established by the local pension plan trustees and seek to maintain the plans' ability to meet liabilities and to comply with local minimum funding requirements. Plan assets are invested in diversified portfolios that provide adequate levels of return at an acceptable level of risk. The investment policies are reviewed at least annually and revised, as deemed appropriate to ensure that the objectives are being met. At March 31, 2020, the targeted allocation for the plans were approximately 75% equity investments and 25% fixed income investments.
Financial instruments included in pension plan assets are categorized into three tiers. These tiers include a fair value hierarchy of three levels, based on the degree of subjectivity inherent in the valuation methodology as follows:
Level 1 - Quoted prices for identical assets in active markets.
Level 2 - Quoted prices for similar assets in active markets with inputs that are observable, either directly or indirectly.
Level 3 - Unobservable prices or inputs in which little or no market data exists.
The fair value of our pension benefits plan assets at March 31, 2020 and 2019 by asset category is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2020
|
|
(In thousands)
|
|
Total
|
|
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
Cash
|
|
$
|
302
|
|
|
$
|
302
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Insured annuities
|
|
14,522
|
|
|
—
|
|
|
14,522
|
|
|
—
|
|
|
Insurance contracts
|
|
4,345
|
|
|
—
|
|
|
—
|
|
|
4,345
|
|
|
Common and collective trusts valued at net asset value:
|
|
|
|
|
|
|
|
|
|
Equity security trusts
|
|
47,187
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Debt security trusts
|
|
45,847
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total Plan Assets
|
|
$
|
112,203
|
|
|
$
|
302
|
|
|
$
|
14,522
|
|
|
$
|
4,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2019
|
|
(In thousands)
|
|
Total
|
|
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
Cash
|
|
$
|
450
|
|
|
$
|
450
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Insured annuities
|
|
14,720
|
|
|
—
|
|
|
14,720
|
|
|
—
|
|
|
Insurance contracts
|
|
5,089
|
|
|
—
|
|
|
—
|
|
|
5,089
|
|
|
Common and collective trusts valued at net asset value:
|
|
|
|
|
|
|
|
|
|
Equity security trusts
|
|
73,532
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Debt security trusts
|
|
23,713
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total Plan Assets
|
|
$
|
117,504
|
|
|
$
|
450
|
|
|
$
|
14,720
|
|
|
$
|
5,089
|
|
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
Collective investment trusts are measured at fair value using the net asset value per share practical expedient. These trusts have not been categorized in the fair value hierarchy and are being presented in the tables above to permit a reconciliation of the fair value hierarchy to the total plan assets.
The fair value measurement of plan assets using significant unobservable inputs (Level 3) changed during fiscal year 2020 due to the following:
|
|
|
|
|
|
|
|
|
|
|
Insurance contracts
|
|
Balance at March 31, 2018
|
|
$
|
5,484
|
|
|
Gains (losses) related to assets still held at year-end
|
|
29
|
|
|
Transfers out of Level 3
|
|
(132
|
)
|
|
Foreign currency
|
|
(292
|
)
|
|
Balance at March 31, 2019
|
|
$
|
5,089
|
|
|
Gains (losses) related to assets still held at year-end
|
|
62
|
|
|
Transfers out of Level 3
|
|
(664
|
)
|
|
Foreign currency
|
|
(142
|
)
|
|
Balance at March 31, 2020
|
|
$
|
4,345
|
|
Cash Flows. We contribute amounts to our defined benefit pension plans at least equal to the minimum amounts required by applicable employee benefit laws and local tax laws. We expect to make contributions of approximately $3,839 during fiscal 2021.
Based upon the actuarial assumptions utilized to develop our benefit obligations at March 31, 2020, the following benefit payments are expected to be made to plan participants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Defined Benefit Pension Plans
|
|
Other Post-Retirement Benefits Plan
|
|
2021
|
|
$
|
5,872
|
|
|
$
|
1,510
|
|
|
2022
|
|
6,025
|
|
|
1,392
|
|
|
2023
|
|
6,600
|
|
|
1,252
|
|
|
2024
|
|
6,336
|
|
|
1,115
|
|
|
2025
|
|
6,518
|
|
|
1,007
|
|
|
2026-2031
|
|
35,292
|
|
|
3,726
|
|
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) provides a prescription drug benefit for Medicare beneficiaries, a benefit we provide to Medicare eligible retirees covered by our post-retirement benefits plan. We have concluded that the prescription drug benefit provided in our post-retirement benefit plan is considered to be actuarially equivalent to the benefit provided under the Act and thus qualifies for the subsidy under the Act. Benefits are subject to a per capita per month cost cap and any costs above the cap become the responsibility of the retiree. Under the plan, the subsidy is applied to reduce the retiree responsibility. As a result, the expected future subsidy no longer reduces our accumulated post-retirement benefit obligation and net periodic benefit cost. We collected subsidies totaling approximately $708 and $706, during fiscal 2020 and fiscal 2019, respectively, which reduced the retiree responsibility for costs in excess of the caps established in the post-retirement benefit plan.
Defined Contribution Plans. We maintain a 401(k) defined contribution plan for eligible U.S. employees, a 401(k) defined contribution plan for eligible Puerto Rico employees and similar savings plans for certain employees in Canada, United Kingdom, Ireland, and Finland. We provide a match on a specified portion of an employee’s contribution. The U.S. plan assets are held in trust and invested as directed by the plan participants. The Canadian plan assets are held by insurance companies. The aggregate fair value of the U.S. plan assets was $668,960 at March 31, 2020. At March 31, 2020, the U.S. plan held 555,080 STERIS ordinary shares with a fair value of $77,695. We paid dividends of $855, $826, and $781 to the plan and participants on STERIS shares held by the plan for the years ended March 31, 2020, 2019, and 2018, respectively. We contributed approximately $27,818, $25,935, and $24,037, to the defined contribution plans for the years ended March 31, 2020, 2019, and 2018, respectively.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
We also maintain a domestic non-qualified deferred compensation plan covering certain employees, which formerly allowed for the deferral of compensation for an employee-specified term or until retirement or termination. There have been no employee contributions made to this plan since fiscal 2012. The Plan was amended in fiscal 2012 to disallow deferrals of salary payable in 2012 and subsequent calendar years and of commissions and other incentive compensation payable in respect of the 2013 and subsequent fiscal years. We hold investments in mutual funds to satisfy future obligations of the plan. We account for these assets as available-for-sale securities and they are included in “Other assets” on our accompanying Consolidated Balance Sheets, with a corresponding liability for the plan’s obligation recorded in “Accrued expenses and other.” The aggregate value of the assets was $1,273 and $1,400 at March 31, 2020 and March 31, 2019, respectively. Realized gains and losses on these investments are recorded in “Interest and miscellaneous income” within “Non-operating expenses” on our accompanying Consolidated Statements of Income. Changes in the fair value of the assets are recorded in other comprehensive income on our accompanying balance sheets.
10. 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 stated that the agency had concerns regarding operational business processes. In the second half of calendar 2019, the FDA conducted a comprehensive inspection of the Albert Browne facility in question. In a May 12, 2020 email, the FDA provided the Company with a copy of the Inspection Report. In that same email the FDA advised the Company that the email would serve as a "No Action Indicated" notice and that it was finalizing a Warning Letter Closeout to be provided to the Company. These actions bring this matter to a favorable conclusion for the Company.
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 risks and uncertainties described under the title "product related regulations and claims" in Item 1A. of this Annual Report on Form 10-K.
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 8 to our consolidated financial statements titled, “Income Taxes” in this Annual Report on Form 10-K.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
Additional information regarding our contingencies is included in Item 7 of Part II titled, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations under "Contingencies".
As of March 31, 2020 and 2019, our commercial commitments totaled $80,230 and $73,765, respectively. Commercial commitments include standby letters of credit, letters of credit required as security under our self-insured risk retention policies, and other potential cash outflows resulting from an event that requires payment by us. Approximately $12,474 and $7,794 of the March 31, 2020 and 2019 totals, respectively, relate to letters of credit required as security under our self-insured risk retention policies.
As of March 31, 2020, we had minimum purchase commitments with suppliers for raw material purchases totaling $63,054. As of March 31, 2020, we also had commitments of $91,077 for long term construction contracts.
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 March 31, 2020 and for the twelve 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:
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2020
|
|
Fixed operating lease expense
|
$
|
28,252
|
|
|
Variable operating lease expense
|
5,449
|
|
|
Total operating lease expense
|
$
|
33,701
|
|
Supplemental cash flow information related to operating leases is as follows:
|
|
|
|
|
|
|
|
|
Year Ended March 31, 2020
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
$
|
27,613
|
|
|
Right-of-use assets obtained in exchange for operating lease obligations, net
|
$
|
44,636
|
|
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
Maturities of lease liabilities at March 31, 2020 are as follows:
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
2021
|
$
|
25,302
|
|
|
2022
|
21,064
|
|
|
2023
|
17,271
|
|
|
2024
|
14,045
|
|
|
2025 and thereafter
|
96,249
|
|
|
Total operating lease payments
|
173,931
|
|
|
Less imputed interest
|
40,008
|
|
|
Total operating lease liabilities
|
$
|
133,923
|
|
In the preceding table, the future minimum annual rentals payable under noncancelable leases denominated in foreign currencies have been calculated using March 31, 2020 foreign currency exchange rates.
Supplemental information related to operating leases is as follows:
|
|
|
|
|
|
|
|
March 31,
|
|
|
2020
|
|
Weighted-average remaining lease term of operating leases
|
11.5 years
|
|
|
|
|
|
Weighted-average discount rate of operating leases
|
4.4
|
%
|
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.
11. BUSINESS SEGMENT INFORMATION
We operate and report in four reportable business segments: Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies. Corporate is presented separately and contains the 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 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 and specialty services for pharmaceutical manufacturers and research facilities, and capital equipment.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
Our Applied Sterilization Technologies ("AST") segment provides contract sterilization and testing services for medical device and pharmaceutical manufacturers.
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. In fiscal 2019, we ceased the allocation of certain corporate costs to our segments to align with internal management measures. The prior period operating income measures have been recast for comparability.
For the year ended March 31, 2020, revenues from a single Customer did not represent ten percent or more of any reportable segment’s revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
2020
|
|
2019
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
Healthcare Products
|
|
$
|
1,423,198
|
|
|
$
|
1,338,428
|
|
|
$
|
1,276,054
|
|
|
Healthcare Specialty Services
|
|
563,611
|
|
|
510,057
|
|
|
469,065
|
|
|
Life Sciences
|
|
416,939
|
|
|
378,558
|
|
|
361,590
|
|
|
Applied Sterilization Technologies
|
|
627,147
|
|
|
555,127
|
|
|
513,287
|
|
|
Total revenues
|
|
$
|
3,030,895
|
|
|
$
|
2,782,170
|
|
|
$
|
2,619,996
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
Healthcare Products
|
|
356,419
|
|
|
323,684
|
|
|
294,162
|
|
|
Healthcare Specialty Services
|
|
64,217
|
|
|
64,222
|
|
|
58,458
|
|
|
Life Sciences
|
|
144,088
|
|
|
132,129
|
|
|
123,889
|
|
|
Applied Sterilization Technologies
|
|
270,917
|
|
|
221,828
|
|
|
196,297
|
|
|
Total reportable segments
|
|
835,641
|
|
|
741,863
|
|
|
672,806
|
|
|
Corporate
|
|
(207,015
|
)
|
|
(184,900
|
)
|
|
(162,999
|
)
|
|
Total operating income before adjustments
|
|
$
|
628,626
|
|
|
$
|
556,963
|
|
|
$
|
509,807
|
|
|
Less: Adjustments
|
|
|
|
|
|
|
|
Amortization of acquired intangible assets (1)
|
|
71,675
|
|
|
86,878
|
|
|
67,793
|
|
|
Acquisition and integration related charges (2)
|
|
8,225
|
|
|
8,901
|
|
|
16,211
|
|
|
Redomiciliation and tax restructuring costs (3)
|
|
3,699
|
|
|
8,783
|
|
|
—
|
|
|
(Gain) on fair value adjustment of acquisition related contingent consideration (1)
|
|
—
|
|
|
(842
|
)
|
|
(593
|
)
|
|
Net loss (gain) on divestiture of businesses (1)
|
|
1,770
|
|
|
(1,370
|
)
|
|
14,547
|
|
|
Amortization of property "step up" to fair value (1)
|
|
2,392
|
|
|
2,440
|
|
|
1,599
|
|
|
Restructuring charges (4)
|
|
3,143
|
|
|
40,708
|
|
|
103
|
|
|
Impact of the U.S. Tax Cuts and Jobs Act (5)
|
|
—
|
|
|
—
|
|
|
10,264
|
|
|
COVID-19 incremental costs (6)
|
|
749
|
|
|
—
|
|
|
—
|
|
|
Total operating income
|
|
$
|
536,973
|
|
|
$
|
411,465
|
|
|
$
|
399,883
|
|
(1) For more information regarding our recent acquisitions and divestitures see Note 18 titled, "Business Acquisitions and Divestitures". Amortization of purchased intangible assets fiscal 2019 total includes an impairment charge of $16,249, see Note 3 titled, "Goodwill and Intangible Assets", for more information.
(2) Acquisition and integration related charges include transaction costs and integration expenses associated with acquisitions.
(3) Costs incurred in connection with the Redomiciliation and subsequent tax restructuring.
(4) For more information regarding our restructuring activities see Note 2 titled, "Restructuring".
(5) Represents a one-time special employee bonus paid to most U.S. employees and associated professional fees.
(6) COVID-19 incremental costs includes the additional costs attributable to COVID-19 such as enhanced cleaning protocols, personal protective equipment for our employees, event cancellation fees, and payroll costs associated with our response to COVID-19, net of any government subsidies available.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
Assets include the current and long-lived assets directly attributable to the segment based on the management of the location or on utilization. Certain corporate assets were allocated to the reportable segments based on revenues. Assets attributed to sales and distribution locations are only allocated to the Healthcare Products and Life Sciences segments.
Individual facilities, equipment, and intellectual properties are utilized for production by both the Healthcare Products and Life Sciences segments at varying levels over time. As a result, an allocation of total assets, capital expenditures, and depreciation and amortization is not meaningful to the individual performance of the Healthcare Products and Life Sciences segments. Therefore, their respective amounts are reported together.
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2020
|
|
2019
|
|
Assets:
|
|
|
|
|
|
Healthcare Products and Life Sciences
|
|
$
|
1,809,636
|
|
|
$
|
1,611,852
|
|
|
Healthcare Specialty Services
|
|
895,741
|
|
|
805,349
|
|
|
Applied Sterilization Technologies
|
|
2,720,205
|
|
|
2,655,870
|
|
|
Total assets
|
|
$
|
5,425,582
|
|
|
$
|
5,073,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
2020
|
|
2019
|
|
2018
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
Healthcare Products and Life Sciences
|
|
$
|
44,029
|
|
|
$
|
49,688
|
|
|
$
|
52,767
|
|
|
Healthcare Specialty Services
|
|
40,619
|
|
|
39,950
|
|
|
16,497
|
|
|
Applied Sterilization Technologies
|
|
129,868
|
|
|
100,077
|
|
|
96,193
|
|
|
Total Capital Expenditures
|
|
$
|
214,516
|
|
|
$
|
189,715
|
|
|
$
|
165,457
|
|
|
Depreciation, Depletion, and Amortization
|
|
|
|
|
|
|
|
Healthcare Products and Life Sciences (1) (2)
|
|
$
|
59,150
|
|
|
$
|
81,264
|
|
|
$
|
52,025
|
|
|
Healthcare Specialty Services
|
|
33,043
|
|
|
33,392
|
|
|
29,269
|
|
|
Applied Sterilization Technologies (1)
|
|
105,042
|
|
|
111,265
|
|
|
97,038
|
|
|
Total Depreciation, Depletion, and Amortization
|
|
$
|
197,235
|
|
|
$
|
225,921
|
|
|
$
|
178,332
|
|
(1) The fiscal 2020 and 2019 totals include the impact of Restructuring see Note 2 titled, "Restructuring" for additional information.
(2) The fiscal 2019 total includes an impairment charge see Note 3 titled, "Goodwill and Intangible Assets", for additional information.
Financial information for each of our United States and international geographic areas is presented in the following table. Revenues are based on the location of these operations and their Customers. Property, plant and equipment, net are those assets that are identified within the operations in each geographic area.
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
2020
|
|
2019
|
|
Property, Plant, and Equipment, Net
|
|
|
|
|
|
Ireland
|
|
$
|
47,459
|
|
|
$
|
41,137
|
|
|
United States
|
|
632,333
|
|
|
577,113
|
|
|
Other locations
|
|
432,063
|
|
|
413,332
|
|
|
Property, Plant, and Equipment, Net
|
|
$
|
1,111,855
|
|
|
$
|
1,031,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
2020
|
|
2019
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
Ireland
|
|
$
|
63,821
|
|
|
$
|
56,784
|
|
|
$
|
48,246
|
|
|
United States
|
|
2,211,722
|
|
|
1,976,814
|
|
|
1,836,414
|
|
|
Other locations
|
|
755,352
|
|
|
748,572
|
|
|
735,336
|
|
|
Total Revenues
|
|
$
|
3,030,895
|
|
|
$
|
2,782,170
|
|
|
$
|
2,619,996
|
|
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
2020
|
|
2019
|
|
2018
|
|
Healthcare Products:
|
|
|
|
|
|
|
|
Capital equipment
|
|
$
|
592,436
|
|
|
568,811
|
|
|
527,402
|
|
|
Consumables
|
|
454,518
|
|
|
414,969
|
|
|
412,495
|
|
|
Service
|
|
376,244
|
|
|
354,648
|
|
|
336,157
|
|
|
Total Healthcare Products Revenues
|
|
$
|
1,423,198
|
|
|
$
|
1,338,428
|
|
|
$
|
1,276,054
|
|
|
Total Healthcare Specialty Services Revenues
|
|
$
|
563,611
|
|
|
$
|
510,057
|
|
|
$
|
469,065
|
|
|
Life Sciences:
|
|
|
|
|
|
|
|
Capital equipment
|
|
$
|
112,747
|
|
|
102,714
|
|
|
100,555
|
|
|
Consumables
|
|
185,904
|
|
|
161,780
|
|
|
150,656
|
|
|
Service
|
|
118,288
|
|
|
114,064
|
|
|
110,379
|
|
|
Total Life Sciences Revenues
|
|
$
|
416,939
|
|
|
$
|
378,558
|
|
|
$
|
361,590
|
|
|
Applied Sterilization Technologies Service Revenues
|
|
$
|
627,147
|
|
|
$
|
555,127
|
|
|
$
|
513,287
|
|
|
Total Revenues
|
|
$
|
3,030,895
|
|
|
$
|
2,782,170
|
|
|
$
|
2,619,996
|
|
Effective April 1, 2020, and consistent with the way management will operate and view the business, the current Healthcare Products and Healthcare Specialty Services segments will be combined and reported as one segment, simply called Healthcare. Going forward we will operate and report in three business segments: Healthcare, Life Sciences and Applied Sterilization Technologies. Corporate will continue to be presented separately and contain the costs that are associated with being a publicly traded company and certain other corporate costs.
12. 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. The following is a summary of shares and share equivalents outstanding used in the calculations of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended March 31,
|
|
2020
|
|
2019
|
|
2018
|
|
Denominator (shares in thousands):
|
|
|
|
|
|
|
|
Weighted average shares outstanding—basic
|
|
84,778
|
|
|
84,577
|
|
|
85,028
|
|
|
Dilutive effect of share equivalents
|
|
863
|
|
|
891
|
|
|
685
|
|
|
Weighted average shares outstanding and share equivalents—diluted
|
|
85,641
|
|
|
85,468
|
|
|
85,713
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended March 31,
|
|
2020
|
|
2019
|
|
2018
|
|
Number of ordinary share options (shares in thousands)
|
|
285
|
|
|
352
|
|
|
393
|
|
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.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
13. REPURCHASE 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 March 31, 2020, there was approximately $338,979 (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 fiscal 2020, we repurchased 273,259 of our ordinary shares for the aggregate amount of $40,000 (net of fees and commissions) pursuant to the 2019 authorizations. During fiscal 2019, we repurchased 651,093 of our ordinary shares for the aggregate amount of $72,082 (net of fees and commissions) pursuant to the 2016 authorization. During fiscal 2018, we repurchased 664,963 of our ordinary shares for the aggregate amount of $58,939 (net of fees and commissions) pursuant to the 2016 authorization.
During fiscal 2020, we obtained 122,884 of our ordinary shares in the aggregate amount of $11,235 in connection with share based compensation award programs. During fiscal 2019, we obtained 112,356 of our ordinary shares in the aggregate amount of $8,262 in connection with share based compensation award programs. During fiscal 2018, we obtained 127,903 of our ordinary shares in the aggregate amount of $7,014 in connection with share based compensation award programs.
14. 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 March 31, 2020, 3,961,998 shares remained available for grant under the long-term incentive plan.
The fair value of share-based stock option 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.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
The following weighted-average assumptions were used for options granted during fiscal 2020, fiscal 2019 and fiscal 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2020
|
|
Fiscal 2019
|
|
Fiscal 2018
|
|
Risk-free interest rate
|
|
2.26
|
%
|
|
2.64
|
%
|
|
2.01
|
%
|
|
Expected life of options
|
|
6.2 years
|
|
|
6.2 years
|
|
|
5.7 years
|
|
|
Expected dividend yield of stock
|
|
1.22
|
%
|
|
1.47
|
%
|
|
1.58
|
%
|
|
Expected volatility of stock
|
|
20.27
|
%
|
|
19.91
|
%
|
|
22.08
|
%
|
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%, 2.37% and 2.25% was applied in fiscal 2020, 2019 and 2018 respectively. This rate is calculated based upon historical activity and represents an estimate of the granted options not expected to vest. If actual forfeitures differ from this calculated rate, we may be required to make additional adjustments to compensation expense in future periods. The assumptions used above are reviewed at the time of each significant option grant, or at least annually.
A summary of share option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted
Average
Exercise
Price
|
|
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at March 31, 2019
|
|
2,104,685
|
|
|
$
|
72.82
|
|
|
|
|
|
|
Granted
|
|
345,138
|
|
|
147.22
|
|
|
|
|
|
|
Exercised
|
|
(613,086
|
)
|
|
57.29
|
|
|
|
|
|
|
Forfeited
|
|
(40,611
|
)
|
|
122.61
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
1,796,126
|
|
|
$
|
91.29
|
|
|
6.8 years
|
|
$
|
89,800
|
|
|
Exercisable at March 31, 2020
|
|
922,708
|
|
|
$
|
69.52
|
|
|
5.6 years
|
|
$
|
65,136
|
|
We estimate that 857,860 of the non-vested stock options outstanding at March 31, 2020 will ultimately vest.
The aggregate intrinsic value in the table above represents the total pre-tax difference between the $139.97 closing price of our ordinary shares on March 31, 2020 over the exercise prices of the stock options, multiplied by the number of options outstanding or outstanding and exercisable, as applicable. The aggregate intrinsic value is not recorded for financial accounting purposes and the value changes daily based on the daily changes in the fair market value of our ordinary shares.
The total intrinsic value of stock options exercised during the years ended March 31, 2020, 2019 and 2018 was $57,683, $25,371 and $16,096, respectively. Net cash proceeds from the exercise of stock options were $34,731, $13,308 and $11,093 for the years ended March 31, 2020, 2019 and 2018, respectively. The tax benefit from stock option exercises was $16,440, $8,306 and $6,581 for the years ended March 31, 2020, 2019 and 2018, respectively.
The weighted average grant date fair value of stock option grants was $23.52, $18.12 and $15.51 for the years ended March 31, 2020, 2019 and 2018, 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 March 31, 2020, 2019 and 2018 was $544, $889, and $1,437, respectively. The fair value of outstanding SARS is revalued at each reporting date and the related liability and expense are adjusted appropriately.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
A summary of the non-vested restricted share 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
|
|
156,901
|
|
|
14,553
|
|
|
135.86
|
|
|
Vested
|
|
(221,606
|
)
|
|
(14,999
|
)
|
|
74.63
|
|
|
Forfeited
|
|
(35,838
|
)
|
|
(1,879
|
)
|
|
93.56
|
|
|
Non-vested at March 31, 2020
|
|
575,830
|
|
|
30,894
|
|
|
$
|
98.07
|
|
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 fiscal 2020 was $17,657.
As of March 31, 2020, there was a total of $42,056 in unrecognized compensation cost related to non-vested share-based compensation granted under our share-based compensation plans. We expect to recognize the cost over a weighted average period of 2.1 years.
15. 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 periods presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
2020
|
|
2019
|
|
2018
|
|
Balance, Beginning of Year
|
|
$
|
7,194
|
|
|
$
|
6,872
|
|
|
$
|
6,861
|
|
|
Warranties issued during the period
|
|
12,311
|
|
|
11,177
|
|
|
12,305
|
|
|
Settlements made during the period
|
|
(12,124
|
)
|
|
(10,855
|
)
|
|
(12,294
|
)
|
|
Balance, End of Year
|
|
$
|
7,381
|
|
|
$
|
7,194
|
|
|
$
|
6,872
|
|
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
16. 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 March 31, 2020, we held a foreign currency forward contract to buy 6.0 million Canadian dollars. At March 31, 2020, we held commodity swap contracts to buy 715.2 thousand pounds of nickel.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
|
Fair Value at
|
|
Fair Value at
|
|
Fair Value at
|
|
Fair Value at
|
|
Balance Sheet Location
|
|
March 31, 2020
|
|
March 31, 2019
|
|
March 31, 2020
|
|
March 31, 2019
|
|
Prepaid & Other
|
|
$
|
124
|
|
|
$
|
552
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Accrued expenses and other
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
912
|
|
|
$
|
278
|
|
The following table presents the impact of derivative instruments and their location within the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of (loss) gain recognized in income
|
|
Amount of (loss) gain recognized in income
|
|
Years Ended March 31,
|
|
2020
|
|
2019
|
|
2018
|
|
Foreign currency forward contracts
|
|
Selling, general and administrative
|
|
$
|
798
|
|
|
$
|
235
|
|
|
$
|
(1,357
|
)
|
|
Commodity swap contracts
|
|
Cost of revenues
|
|
$
|
(660
|
)
|
|
$
|
434
|
|
|
$
|
373
|
|
Additionally, we hold our debt in multiple currencies to fund our operations and investments in certain subsidiaries. We designate portions of non-functional 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 $45,765 at March 31, 2020. These hedges are designed to be fully effective and any associated gain or loss is recognized in Accumulated Other Comprehensive Income and will be reclassified to income in the same period when a gain or loss related to the net investment in the foreign operation is included in income.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
17. 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 March 31, 2020 and March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
At March 31,
|
|
Carrying Value
|
|
Quoted Prices
in Active Markets
for Identical Assets
|
|
Significant Other
Observable Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
2020
|
2019
|
|
2020
|
2019
|
|
2020
|
2019
|
|
2020
|
2019
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
319,581
|
|
$
|
220,633
|
|
|
$
|
319,581
|
|
$
|
220,633
|
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
|
Forward and swap contracts (1)
|
|
124
|
|
552
|
|
|
—
|
|
—
|
|
|
124
|
|
552
|
|
|
—
|
|
—
|
|
|
Equity investments (2)
|
|
9,624
|
|
13,873
|
|
|
9,624
|
|
13,873
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
Other investments
|
|
2,507
|
|
2,545
|
|
|
2,507
|
|
2,545
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward and swap contracts (1)
|
|
$
|
912
|
|
$
|
278
|
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
912
|
|
$
|
278
|
|
|
$
|
—
|
|
$
|
—
|
|
|
Deferred compensation plans (2)
|
|
1,475
|
|
1,564
|
|
|
1,475
|
|
1,564
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
Long term debt (3)
|
|
1,150,521
|
|
1,183,227
|
|
|
—
|
|
—
|
|
|
1,143,978
|
|
1,200,558
|
|
|
—
|
|
—
|
|
|
Contingent consideration obligations (4)
|
|
15,988
|
|
5,950
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
15,988
|
|
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 allowed 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. Beginning in fiscal 2019, 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 fiscal 2020 and fiscal 2019 we recorded losses of $3,579 and $2,731, 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 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.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Contingent Consideration
|
|
Balance at March 31, 2018
|
|
$
|
8,068
|
|
|
Payments
|
|
(691
|
)
|
|
Reductions and adjustments
|
|
(1,466
|
)
|
|
Foreign currency translation adjustments
|
|
39
|
|
|
Balance at March 31, 2019
|
|
$
|
5,950
|
|
|
Additions
|
|
9,907
|
|
|
Foreign currency translation adjustments
|
|
131
|
|
|
Balance at March 31, 2020
|
|
$
|
15,988
|
|
Additions and payments of contingent consideration obligations during fiscal year 2020 and 2019 were primarily related to our fiscal year 2020 and 2019 acquisitions. Refer to Note 18, "Business Acquisitions and Divestitures" for more information.
18. BUSINESS ACQUISITIONS AND DIVESTITURES
Fiscal 2020 Acquisitions
During 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 was approximately $120,537, net of cash acquired and including potential contingent consideration of $9,830 and deferred consideration of $893.
Fiscal 2019 Acquisitions
During 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, and was financed with both cash on hand and with credit facility borrowings. Purchase price allocations will be finalized within a measurement period not to exceed one year from closing.
Fiscal 2018 Acquisitions
We completed several minor purchases that 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 was approximately $52,292, net of cash acquired and including contingent consideration of $5,018. The purchase price for the acquisitions was financed with both cash on hand and with credit facility borrowings.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
Fair Value of Assets Acquired and Liabilities Assumed
The table below summarizes the allocation of the purchase price to the net assets acquired based on fair values at the acquisition dates for our fiscal 2020, 2019 and 2018 acquisitions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2020
|
|
Fiscal Year 2019
|
|
Fiscal Year 2018
|
|
(dollars in thousands)
|
All Acquisitions (1)
|
|
All Acquisitions
|
|
All Acquisitions
|
|
Cash
|
$
|
8,811
|
|
|
$
|
—
|
|
|
$
|
235
|
|
|
Accounts receivable
|
10,331
|
|
|
750
|
|
|
1,464
|
|
|
Inventory
|
8,999
|
|
|
51
|
|
|
2,289
|
|
|
Property, plant and equipment
|
9,241
|
|
|
2,004
|
|
|
3,381
|
|
|
Lease right-of-use assets, net
|
4,462
|
|
|
—
|
|
|
—
|
|
|
Other assets
|
1,133
|
|
|
479
|
|
|
126
|
|
|
Intangible assets
|
36,500
|
|
|
4,070
|
|
|
17,404
|
|
|
Goodwill
|
74,531
|
|
|
6,614
|
|
|
32,384
|
|
|
Total Assets
|
154,008
|
|
|
13,968
|
|
|
57,283
|
|
|
Current liabilities
|
(20,659
|
)
|
|
(146
|
)
|
|
(2,077
|
)
|
|
Non-current liabilities
|
(4,000
|
)
|
|
(509
|
)
|
|
(2,679
|
)
|
|
Total Liabilities
|
(24,659
|
)
|
|
(655
|
)
|
|
(4,756
|
)
|
|
Net Assets
|
$
|
129,349
|
|
|
$
|
13,313
|
|
|
$
|
52,527
|
|
(1) Purchase price allocation is still preliminary as of March 31, 2020, as valuations have not been finalized.
Acquisition related transaction and integration costs totaled $8,225, $8,901, and $16,211 for the fiscal years ended March 31, 2020, 2019, and 2018, respectively. These costs are included in Selling, general, and administrative expenses in the Consolidated Statements of Income.
Divestitures
Fiscal 2020
During 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 2018
Synergy Health Healthcare Consumable Solutions
On November 20, 2017, we sold our Synergy Health Healthcare Consumable Solutions ("HCS") business to Vernacare. Annual revenues for the HCS business were approximately $40,000 and were included in the Healthcare Products segment. We recorded proceeds of $8,891, net of cash divested, including a working capital adjustment. We also recognized a pre-tax loss on the sale, subject to final working capital adjustments, of $12,972 in Selling, general, and administrative expense in the Consolidated Statement of Income.
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 interest is payable annually. Outstanding borrowings under the agreement totaled $7,084 at March 31, 2020 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
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
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 $8,072 (or €7,300) at March 31, 2020 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.
19. 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. Accumulated other comprehensive income (loss) shown in our Consolidated Statements of Shareholders' Equity and changes in our balances, net of tax, for the years ended March 31, 2020, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Available for Sale Securities (1) (4)
|
Defined Benefit
Plans (2)
|
Foreign Currency Translation (3)
|
Total Accumulated Other Comprehensive Income (Loss)
|
|
|
2020
|
2019
|
2018
|
2020
|
2019
|
2018
|
2020
|
2019
|
2018
|
2020
|
2019
|
2018
|
|
Beginning Balance
|
$
|
—
|
|
$
|
1,970
|
|
$
|
178
|
|
$
|
(4,204
|
)
|
$
|
(6,742
|
)
|
$
|
(2,355
|
)
|
$
|
(155,574
|
)
|
$
|
16,457
|
|
$
|
(238,525
|
)
|
$
|
(159,778
|
)
|
$
|
11,685
|
|
$
|
(240,702
|
)
|
|
Other Comprehensive Income (Loss) before reclassifications
|
—
|
|
—
|
|
1,703
|
|
1,505
|
|
3,920
|
|
(2,291
|
)
|
(73,076
|
)
|
(172,031
|
)
|
254,982
|
|
(71,571
|
)
|
(168,111
|
)
|
254,394
|
|
|
Reclassified from Accumulated Other Comprehensive Income (Loss)
|
—
|
|
—
|
|
89
|
|
(4,114
|
)
|
(1,382
|
)
|
(2,096
|
)
|
—
|
|
—
|
|
—
|
|
(4,114
|
)
|
(1,382
|
)
|
(2,007
|
)
|
|
Net current-period Other Comprehensive Income (Loss)
|
—
|
|
—
|
|
1,792
|
|
(2,609
|
)
|
2,538
|
|
(4,387
|
)
|
(73,076
|
)
|
(172,031
|
)
|
254,982
|
|
(75,685
|
)
|
(169,493
|
)
|
252,387
|
|
|
Cumulative adjustment to Retained Earnings (4)
|
$
|
—
|
|
$
|
(1,970
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(1,970
|
)
|
$
|
—
|
|
|
Ending Balance
|
$
|
—
|
|
$
|
—
|
|
$
|
1,970
|
|
$
|
(6,813
|
)
|
$
|
(4,204
|
)
|
$
|
(6,742
|
)
|
$
|
(228,650
|
)
|
$
|
(155,574
|
)
|
$
|
16,457
|
|
$
|
(235,463
|
)
|
$
|
(159,778
|
)
|
$
|
11,685
|
|
(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 for fiscal 2018.
(2) Amortization (gain) of defined benefit plan items are 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.
(4) 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. See Note 1 titled, "Nature of Operations and Summary of Significant Accounting Policies" for further details.
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
20. QUARTERLY RESULTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
March 31,
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
Fiscal 2020
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Product
|
$
|
393,592
|
|
|
$
|
363,795
|
|
|
$
|
337,666
|
|
|
$
|
307,735
|
|
|
Service
|
429,399
|
|
|
410,466
|
|
|
399,174
|
|
|
389,068
|
|
|
Total Revenues
|
822,991
|
|
|
774,261
|
|
|
736,840
|
|
|
696,803
|
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
Product
|
210,538
|
|
|
195,105
|
|
|
183,600
|
|
|
160,959
|
|
|
Service
|
248,393
|
|
|
247,803
|
|
|
234,573
|
|
|
230,001
|
|
|
Total Cost of Revenues
|
458,931
|
|
|
442,908
|
|
|
418,173
|
|
|
390,960
|
|
|
Gross Profit
|
364,060
|
|
|
331,353
|
|
|
318,667
|
|
|
305,843
|
|
|
Percentage of Revenues
|
44.2
|
%
|
|
42.8
|
%
|
|
43.2
|
%
|
|
43.9
|
%
|
|
Restructuring Expenses
|
6
|
|
|
(448
|
)
|
|
(274
|
)
|
|
1,389
|
|
|
Net Income Attributable to Shareholders
|
$
|
123,316
|
|
|
$
|
104,930
|
|
|
$
|
94,769
|
|
|
$
|
84,590
|
|
|
Basic Income Per Ordinary Share Attributable to Shareholders:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
1.45
|
|
|
$
|
1.24
|
|
|
$
|
1.12
|
|
|
$
|
1.00
|
|
|
Diluted Income Per Ordinary Share Attributable to Shareholders:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
1.44
|
|
|
$
|
1.23
|
|
|
$
|
1.11
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Product
|
$
|
374,937
|
|
|
$
|
327,639
|
|
|
$
|
314,659
|
|
|
$
|
278,790
|
|
|
Service
|
393,276
|
|
|
368,599
|
|
|
364,302
|
|
|
359,968
|
|
|
Total Revenues
|
768,213
|
|
|
696,238
|
|
|
678,961
|
|
|
638,758
|
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
Product
|
201,357
|
|
|
182,229
|
|
|
172,107
|
|
|
146,602
|
|
|
Service
|
232,140
|
|
|
227,012
|
|
|
222,190
|
|
|
223,106
|
|
|
Total Cost of Revenues
|
433,497
|
|
|
409,241
|
|
|
394,297
|
|
|
369,708
|
|
|
Gross Profit
|
334,716
|
|
|
286,997
|
|
|
284,664
|
|
|
269,050
|
|
|
Percentage of Revenues
|
43.6
|
%
|
|
41.2
|
%
|
|
41.9
|
%
|
|
42.1
|
%
|
|
Restructuring Expenses
|
4,840
|
|
|
26,147
|
|
|
—
|
|
|
—
|
|
|
Net Income Attributable to Shareholders
|
$
|
108,745
|
|
|
$
|
47,858
|
|
|
$
|
77,457
|
|
|
$
|
69,991
|
|
|
Basic Income Per Ordinary Share Attributable to Shareholders:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
1.29
|
|
|
$
|
0.57
|
|
|
$
|
0.92
|
|
|
$
|
0.83
|
|
|
Diluted Income Per Ordinary Share Attributable to Shareholders:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
1.27
|
|
|
$
|
0.56
|
|
|
$
|
0.91
|
|
|
$
|
0.82
|
|
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts and as noted)
21. SUBSEQUENT EVENTS
The COVID-19 pandemic began to impact our business late in fiscal 2020. The coronavirus pandemic and related public health recommendations and mandated precautions to mitigate the spread of COVID-19, including deferral of medical procedures and treatments and shelter-in-place orders or similar measures, is negatively affecting, and is expected to continue to affect some of our operations which would impact our financial position and cash flows in fiscal 2021. We have experienced and expect to continue to experience unpredictable fluctuations in demand for certain of our products and services, including some products and services that are experiencing increased demand.