Document
Table of Contents

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

For the quarterly period ended June 30, 2016
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______            

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer  x
  
Accelerated Filer  o
Non-Accelerated Filer  o
(Do not check if a smaller reporting company)
  
Smaller Reporting Company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

The number of ordinary shares outstanding as of July 29, 2016: 86,148,639

1

Table of Contents

STERIS plc and Subsidiaries
Form 10-Q
Index
 
 
 
Page
 
 
 
 
 


2

Table of Contents

PART 1—FINANCIAL INFORMATION

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

ITEM 1.
FINANCIAL STATEMENTS


STERIS PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
 
 
June 30,
2016
 
March 31,
2016
 
 
(Unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
242,423

 
$
248,841

Accounts receivable (net of allowances of $9,420 and $11,185, respectively)
 
439,845

 
471,523

Inventories, net
 
209,645

 
192,792

Prepaid expenses and other current assets
 
53,972

 
59,369

Total current assets
 
945,885

 
972,525

Property, plant, and equipment, net
 
1,055,706

 
1,064,319

Goodwill and intangibles, net
 
3,258,546

 
3,279,942

Other assets
 
33,034

 
29,630

Total assets
 
$
5,293,171

 
$
5,346,416

Liabilities and equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
123,253

 
$
139,572

Accrued income taxes
 
14,882

 
13,683

Accrued payroll and other related liabilities
 
70,523

 
93,976

Accrued expenses and other
 
150,802

 
153,375

Total current liabilities
 
359,460

 
400,606

Long-term indebtedness
 
1,551,838

 
1,567,796

Deferred income taxes, net
 
250,932

 
254,824

Other liabilities
 
82,456

 
84,298

Total liabilities
 
$
2,244,686

 
$
2,307,524

Commitments and contingencies (see note 9)
 

 

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

 
15

Ordinary shares, with £0.10 par value; £17,006 shares aggregate par amount authorized; 86,151 and 85,920 ordinary shares issued and outstanding, respectively
 
2,161,050

 
2,151,719

Retained earnings
 
961,924

 
939,459

Accumulated other comprehensive (loss) income
 
(85,718
)
 
(68,159
)
Total shareholders’ equity
 
3,037,271

 
3,023,034

Noncontrolling interests
 
11,214

 
15,858

Total equity
 
3,048,485

 
3,038,892

Total liabilities and equity
 
$
5,293,171

 
$
5,346,416


See notes to consolidated financial statements.

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Table of Contents

STERIS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended June 30,
 
 
2016
 
2015
Revenues:
 
 
 
 
Product
 
$
271,750

 
$
232,307

Service
 
366,628

 
207,595

Total revenues
 
638,378

 
439,902

Cost of revenues:
 
 
 
 
Product
 
142,698

 
129,856

Service
 
255,690

 
125,956

Total cost of revenues
 
398,388

 
255,812

Gross profit
 
239,990

 
184,090

Operating expenses:
 
 
 
 
Selling, general, and administrative
 
151,886

 
126,835

Research and development
 
14,428

 
13,765

Restructuring expenses
 
154

 
(726
)
Total operating expenses
 
166,468

 
139,874

Income from operations
 
73,522

 
44,216

Non-operating expenses, net:
 
 
 
 
Interest expense
 
11,071

 
6,120

Interest income and miscellaneous expense
 
(493
)
 
(482
)
Total non-operating expenses, net
 
10,578

 
5,638

Income before income tax expense
 
62,944

 
38,578

Income tax expense
 
14,234

 
14,267

Net income
 
48,710

 
24,311

Less: Net income attributable to noncontrolling interests
 
309

 
20

Net income attributable to shareholders
 
$
48,401

 
$
24,291

 
 
 
 
 
Net income per share
 
 
 
 
Basic
 
$
0.56

 
$
0.41

Diluted
 
$
0.56

 
$
0.40

Cash dividends declared per share outstanding
 
$
0.25

 
$
0.23


See notes to consolidated financial statements.


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Table of Contents

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

 
Three Months Ended June 30,
 
2016
 
2015
Net income
$
48,710

 
$
24,311

  Less: Net income attributable to noncontrolling interests
309

 
20

Net income attributable to shareholders
48,401

 
24,291

 
 
 
 
Other comprehensive income (loss)
 
 
 
Unrealized loss on available for sale securities, (net of taxes of $34 and $226, respectively)
(120
)
 
(848
)
Amortization of pension and postretirement benefit plans costs, (net of taxes of $241 and $95, respectively)
(390
)
 
(153
)
Change in cumulative foreign currency translation adjustment
(17,049
)
 
13,798

Total other comprehensive loss
(17,559
)
 
12,797

Comprehensive income
$
30,842

 
$
37,088


See notes to consolidated financial statements.




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Table of Contents

STERIS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
 
 
Three Months Ended June 30,
 
 
2016
 
2015
Operating activities:
 
 
 
 
Net income
 
$
48,710

 
$
24,311

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, depletion, and amortization
 
53,784

 
22,353

Deferred income taxes
 
989

 
5,629

Share-based compensation expense
 
4,187

 
3,145

Loss on the disposal of property, plant, equipment, and intangibles, net
 
126

 
3

Excess tax benefit from share-based compensation
 

 
(3,910
)
Other items
 
(17,713
)
 
(19,838
)
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
 
Accounts receivable, net
 
23,248

 
38,869

Inventories, net
 
(19,765
)
 
(18,174
)
Other current assets
 
3,687

 
463

Accounts payable
 
(13,246
)
 
(5,696
)
Accruals and other, net
 
(3,691
)
 
(6,002
)
Net cash provided by operating activities
 
80,316

 
41,153

Investing activities:
 
 
 
 
Purchases of property, plant, equipment, and intangibles, net
 
(35,357
)
 
(23,518
)
Proceeds from the sale of property, plant, equipment, and intangibles
 
4,526

 
28

Purchase of investments
 
(4,564
)
 

Acquisition of business, net of cash acquired
 
(250
)
 
(44,310
)
Net cash used in investing activities
 
(35,645
)
 
(67,800
)
Financing activities:
 
 
 
 
Proceeds from issuance of long-term obligations
 

 
350,000

Payments on long-term obligations
 
(5,000
)
 

Payments under credit facilities, net
 
(11,079
)
 
(283,250
)
Deferred financing fees and debt issuance costs
 

 
(1,978
)
Acquisition related deferred or contingent consideration
 
(6,000
)
 

Repurchases of ordinary shares
 
(5,171
)
 
(9,573
)
Cash dividends paid to ordinary shareholders
 
(21,538
)
 
(13,758
)
Proceeds from issuance of equity to minority shareholders
 
5,022

 

Stock option and other equity transactions, net
 
758

 
4,881

Excess tax benefit from share-based compensation
 

 
3,910

Net cash (used in) provided by financing activities
 
(43,008
)
 
50,232

Effect of exchange rate changes on cash and cash equivalents
 
(8,081
)
 
4,919

(Decrease) increase in cash and cash equivalents
 
(6,418
)
 
28,504

Cash and cash equivalents at beginning of period
 
248,841

 
167,689

Cash and cash equivalents at end of period
 
$
242,423

 
$
196,193


See notes to consolidated financial statements.


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Table of Contents

STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the Three Months Ended June 30, 2016 and 2015
(dollars in thousands, except per share amounts)

1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

STERIS plc, a public limited company organized under the laws of England and Wales, was incorporated on October 9, 2014 as a private limited company under the name New STERIS Limited and was re-registered effective November 2, 2015 as a public limited company under the name STERIS plc. New STERIS Limited was established to effect the combination (“Combination”) of STERIS Corporation, an Ohio corporation (“Old STERIS”), and Synergy Health plc, a public limited company organized under the laws of England and Wales (“Synergy”). The Combination closed on November 2, 2015 and as a result STERIS plc became the ultimate parent company of Old STERIS and Synergy. Synergy has been re-registered under the name Synergy Health Limited. The acquisition of Old STERIS was accounted for in the consolidated financial statements as a merger between entities under common control; accordingly the historical consolidated financial statements of Old STERIS for periods prior to November 2, 2015, are considered to be the historical financial statements of STERIS plc. Due to the timing of the Combination, the results of Synergy are only reflected in the results of operations of the Company from November 2, 2015 forward which affects comparability to the prior period historical operations of the Company throughout this Quarterly Report on Form 10-Q.

STERIS offers Customers capital equipment products, such as sterilizers and surgical tables; connectivity solutions such as operating room integration; consumable products, such as detergents, gastrointestinal endoscopy accessories, barrier product solutions, and other products and services, including: equipment installation and maintenance, microbial reduction of medical devices, instrument and scope repair solutions, among other services.

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

Interim Financial Statements

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

These interim consolidated financial statements should be read together with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended March 31, 2016 dated May 31, 2016. The Consolidated Balance Sheet at March 31, 2016 was derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

Principles of Consolidation

We use the consolidation method to report our investment in our subsidiaries. Therefore, the accompanying consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. We eliminate inter-company accounts and transactions when we consolidate these accounts. Investments in equity of unconsolidated affiliates, over which the Company has significant influence, but not control, over the financial and operating polices, are accounted for primarily using the equity method. These investments are immaterial to the Company's Consolidated Financial Statements. In prior periods we presented income attributable to noncontrolling interests in the "Interest income and miscellaneous expense" line of our Consolidated Statements of Income and the amounts were not material.





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Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2016 and 2015
(dollars in thousands)





Use of Estimates

We make certain estimates and assumptions when preparing financial statements according to U.S. GAAP that affect the reported amounts of assets and liabilities at the financial statement dates and the reported amounts of revenues and expenses during the periods presented. These estimates and assumptions involve judgments with respect to many factors that are difficult to predict and are beyond our control. Actual results could be materially different from these estimates. We revise the estimates and assumptions as new information becomes available. This means that operating results for the three month period ended June 30, 2016 are not necessarily indicative of results that may be expected for future quarters or for the full fiscal year ending March 31, 2017.


Recently Issued Accounting Standards Impacting the Company

Recently issued accounting standards impacting the Company are presented in the following table:



Standard
 
Date of Issuance
 
Description
 
Date of Adoption
 
Effect on the financial statements or other significant matters
Standards that have recently been adopted
ASU 2015-05, "Goodwill and other-Internal-Use Software" (Subtopic 350-40)
 
April 2015
 
The standard provides guidance on a customer's accounting for fees paid in cloud computing arrangements. Previously, there was no U.S. GAAP guidance on accounting for such fees from the customer's perspective. Under the standard, customers will apply the same criteria as vendors to determine whether the arrangement contains a software license or is solely a service contract. The determination could impact the classification of advance payments in the statements of financial position and cash flows as well as the classification of the expenses in the results of operations. The standard is effective for annual periods beginning after December 15, 2015 and interim periods within that period. Early adoption is permitted.
 
First Quarter Fiscal 2017
 
The adoption of this standard did not have a material impact on our statements of consolidated financial position, results of operations and cash flows.

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Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2016 and 2015
(dollars in thousands)



ASU 2016-09, "Stock Compensation: Improvements to Employee Share-Based Payment Accounting" (Topic 718)
 
March 2016
 
The update simplifies several aspects of the accounting for share-based payment award transactions, including income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2016 and interim periods within that period. Early adoption is permitted.
 
First Quarter Fiscal 2017
 
As a result of the adoption of this standard, we recorded $2.4 million of excess tax benefits associated with share based compensation in the statement of income for the three months ended June 30, 2016 and have included the associated cash flows as cash provided by operating activities. Prior periods have not been restated.
Standards that have yet to be adopted
ASU 2014-09, "Revenue from Contracts with Customers"
 
May 2014
 
The standard will replace existing revenue recognition standards and significantly expand the disclosure requirements for revenue arrangements. It may be adopted either retrospectively or on a modified retrospective basis to new contracts and existing contracts with remaining performance obligations as of the effective date. The standard update is effective for annual periods beginning after December 15, 2017 and interim periods within that period, early adoption is not permitted before the original public entity effective date of December 15, 2016.
 
N/A
 
We are currently in the process of evaluating the impact that the standard will have on our consolidated financial position, results of operations and cash flows.
ASU 2016-02, "Leases" (Topic 842)
 
February 2016
 
The update will require lessees to record all leases, whether finance or operating, on the balance sheet. An asset will be recorded to represent the right to use the leased asset, and a liability will be recorded to represent the lease obligation. The standard is effective for annual periods beginning after December 15, 2018 and interim periods within that period. Early adoption is permitted.
 
N/A
 
We are in the process of evaluating the impact that the standard will have on our statements of consolidated financial position, results of operations and cash flows.
ASU 2016-07, "Investments - Equity Method and Joint Ventures, Simplifying the Transition to the Equity Method of Accounting" (Topic 323)
 
March 2016
 
The update replaces the previous requirement to retroactively adopt the equity method. The new standard requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The standard is effective for annual periods beginning after December 15, 2016 and interim periods within that period. Early adoption is permitted.
 
N/A
 
We do not expect the adoption of this standard to have a material impact on our statements of consolidated financial position, results of operations and cash flows.


A detailed description of our significant and critical accounting policies, estimates, and assumptions is included in our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2016 dated May 31, 2016. Our significant and critical accounting policies, estimates, and assumptions have not changed materially from March 31, 2016.


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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2016 and 2015
(dollars in thousands)




2. Restructuring

Fiscal 2014 Restructuring Plan. During the fourth quarter of fiscal 2014, we adopted and announced a targeted restructuring plan primarily focused on the closure of our Hopkins manufacturing facility located in Mentor, Ohio (the “Fiscal 2014 Restructuring Plan”). As a result of this plan, we will transfer operations located at Hopkins to other North American locations. We believe that by closing the operations at Hopkins we will more effectively utilize our existing North American manufacturing network while reducing operating costs.
Since the inception of the Fiscal 2014 Restructuring Plan, we have incurred pre-tax expenses totaling $19,128 related to these actions, of which $11,032 was recorded as restructuring expenses and $8,096 was recorded in cost of revenues, with restructuring expenses of $15,726, $1,293, $829, and $1,280 related to the Healthcare Products, Healthcare Specialty Services, Life Sciences and Applied Sterilization Technologies segments, respectively.
The following table summarizes our total pre-tax restructuring expenses for the first quarters of fiscal 2017 and fiscal 2016:
Three Months Ended June 30, 2016
Fiscal 2014
Restructuring
Plan
Lease termination obligation and other
$
154

Total restructuring charges
$
154

Three Months Ended June 30, 2015
Fiscal 2014
Restructuring
Plan (1)
Severance and other compensation related costs
$
(806
)
Lease termination obligation and other
80

Product rationalization
277

Total restructuring benefit
$
(449
)
(1) Includes $277 in expense recorded to cost of revenues on Consolidated Statements of Income.

Liabilities related to restructuring activities were $688 and $700 at June 30, 2016 and March 31, 2016, respectively and are recorded as current liabilities on the accompanying Consolidated Balance Sheets within “Accrued payroll and other related liabilities” and “Accrued expenses and other.”
 

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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2016 and 2015
(dollars in thousands)



3. Property, Plant and Equipment

Information related to the major categories of our depreciable assets is as follows:
 
 
 
June 30,
2016
 
March 31,
2016
Land and land improvements (1)
 
$
39,054

 
$
39,051

Buildings and leasehold improvements
 
443,234

 
446,277

Machinery and equipment
 
574,277

 
580,962

Linens
 
42,291

 
42,354

Information systems
 
131,487

 
126,180

Radioisotope
 
434,189

 
434,152

Construction in progress (1)
 
89,692

 
79,291

Total property, plant, and equipment
 
1,754,224

 
1,748,267

Less: accumulated depreciation and depletion
 
(698,518
)
 
(683,948
)
Property, plant, and equipment, net
 
$
1,055,706

 
$
1,064,319

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

4. Inventories, Net

Inventories, net are stated at the lower of cost or market. We use the last-in, first-out (“LIFO”) and first-in, first-out cost methods. An actual valuation of inventory under the LIFO method is made only at the end of the fiscal year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and are subject to the final fiscal year-end LIFO inventory valuation. Inventory costs include material, labor, and overhead. Inventories, net consisted of the following:
 
 
 
June 30,
2016
 
March 31,
2016
Raw materials
 
$
67,374

 
$
62,673

Work in process
 
22,192

 
19,614

Finished goods
 
156,236

 
146,820

LIFO reserve
 
(17,270
)
 
(17,608
)
Reserve for excess and obsolete inventory
 
(18,887
)
 
(18,707
)
Inventories, net
 
$
209,645

 
$
192,792


5. Debt

Indebtedness was as follows:
 
 
 
June 30,
2016
 
March 31,
2016
Private Placement
 
$
666,000

 
$
666,000

Deferred financing costs
 
(3,299
)
 
(3,420
)
Credit Agreement
 
889,137

 
905,216

Total long term debt
 
$
1,551,838

 
$
1,567,796


Additional information regarding our indebtedness is included in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2016 dated May 31, 2016.


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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2016 and 2015
(dollars in thousands)



6. Additional Consolidated Balance Sheet Information

Additional information related to our Consolidated Balance Sheets is as follows:
 
 
 
June 30,
2016
 
March 31,
2016
Accrued payroll and other related liabilities:
 
 
 
 
Compensation and related items
 
$
37,685

 
$
30,175

Accrued vacation/paid time off
 
12,070

 
14,368

Accrued bonuses
 
8,679

 
31,502

Accrued employee commissions
 
8,727

 
13,809

Other postretirement benefit obligations-current portion
 
2,463

 
2,463

Other employee benefit plans obligations-current portion
 
899

 
1,659

Total accrued payroll and other related liabilities
 
$
70,523

 
$
93,976

Accrued expenses and other:
 
 
 
 
Deferred revenues
 
$
64,205

 
$
56,238

Self-insured risk reserves-current portion
 
8,294

 
8,266

Accrued dealer commissions
 
13,982

 
12,717

Accrued warranty
 
5,856

 
5,909

Other
 
58,465

 
70,245

Total accrued expenses and other
 
$
150,802

 
$
153,375

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

 
$
13,257

Other postretirement benefit obligations-long-term portion
 
15,621

 
15,932

Defined benefit pension plans obligations-long-term portion
 
23,221

 
25,301

Other employee benefit plans obligations-long-term portion
 
4,186

 
4,366

Asset retirement obligation-long-term portion
 
10,059

 
10,342

Other
 
16,112

 
15,100

Total other liabilities
 
$
82,456

 
$
84,298


7. Income Tax Expense

Income tax expense includes United States federal, state and local, and foreign income taxes, and is based on reported pre-tax income. The effective income tax rates for the three-month periods ended June 30, 2016 and 2015 were 22.6% and 37.0%, respectively. The first quarter of fiscal 2017 was favorably impacted by benefits achieved in conjunction with the Synergy transaction and the adoption of ASU 2016-09: "Stock Compensation: Improvements to Employee Share-Based Payment Accounting" (Topic 718).

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

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



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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2016 and 2015
(dollars in thousands)



8. Benefit Plans

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

The Synergy Radeberg and Synergy Alleshausen Schemes are German defined benefit funded pension schemes which are closed to new entrants.
The Synergy Daniken Scheme is a Swiss defined benefit funded pension scheme. 
      
Components of the net periodic benefit cost for our defined benefit pension plans and other postretirement medical benefits plan were as follows:
 
 
 
AMSCO Plan
 
Other Defined Benefit Pension Plan
 
Other Postretirement Benefits Plan
Three Months Ended June 30,
 
2016
2015
 
2016
2015
 
2016
2015
Service cost
 
$

$
16

 
$
472

$

 
$

$

Interest cost
 

336

 
189


 
139

148

Expected return on plan assets
 

(605
)
 


 


Amortization of loss
 

361

 


 
184

207

Amortization of prior service cost
 


 


 
(816
)
(815
)
Net periodic benefit cost
 
$

$
108

 
$
661

$

 
$
(493
)
$
(460
)

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


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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2016 and 2015
(dollars in thousands)



Finally, the Dutch linen business acquired in the Synergy combination participates in a multi-employer industry-wide defined benefit scheme. Participation in this pension plan is mandatory. The pension scheme is an average pay scheme with a conditional fee (indexation). Indexation of assets and liabilities granted under the pension scheme takes place only if and insofar as the resources of the fund allow for it and this decision is taken by the pension fund. The pension entitlements under the pension plan are fully reinsured. It is not possible to identify the share of the underlying assets, liabilities, and overall surplus/deficit of the scheme attributable to the business, because the scheme is industry-wide. Under the guidance provided in ASC 715, "Compensation-Retirement Benefits", the scheme is treated as a defined contribution scheme within our financial statements. The total cost charged to the income statement in respect to this scheme was $661 for the three months ended June 30, 2016.

9. Commitments and Contingencies

We are, and will likely continue to be, involved in a number of legal proceedings, government investigations, and claims, which we believe generally arise in the course of our business, given our size, history, complexity, and the nature of our business, products, Customers, regulatory environment, and industries in which we participate. These legal proceedings, investigations and claims generally involve a variety of legal theories and allegations, including, without limitation, personal injury (e.g., slip and falls, burns, vehicle accidents), product liability or regulation (e.g., based on product operation or claimed malfunction, failure to warn, failure to meet specification, or failure to comply with regulatory requirements), product exposure (e.g., claimed exposure to chemicals, asbestos, contaminants, radiation), property damage (e.g., claimed damage due to leaking equipment, fire, vehicles, chemicals), commercial claims (e.g., breach of contract, economic loss, warranty, misrepresentation), financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters), and other claims for damage and relief.
We believe we have adequately reserved for our current litigation and claims that are probable and estimable, and further believe that the ultimate outcome of these pending lawsuits and claims will not have a material adverse effect on our consolidated financial position or results of operations taken as a whole. Due to their inherent uncertainty, however, there can be no assurance of the ultimate outcome or effect of current or future litigation, investigations, claims or other proceedings (including without limitation the matters discussed below). For certain types of claims, we presently maintain insurance coverage for personal injury and property damage and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us.
On May 31, 2012, our Albert Browne Limited subsidiary received a warning letter from the FDA regarding chemical indicators manufactured in the United Kingdom. These devices are intended for the monitoring of certain sterilization and other processes. The FDA warning letter states that the agency has concerns regarding operational business processes. We do not believe that the FDA's concerns are related to product performance, or that they result from Customer complaints. We have reviewed our processes with the agency and finalized our remediation measures, and are awaiting FDA reinspection. We do not currently believe that the impact of this event will have a material adverse effect on our financial results.
On December 19, 2014, a purported shareholder of Old STERIS filed a Verified Stockholder Derivative Complaint in the Court of Common Pleas, Cuyahoga County, Ohio (the "Court"), against the members of Old STERIS’s board of directors and certain officers of Old STERIS, challenging the excise tax make-whole payments approved by Old STERIS’s board in connection with the Combination. Old STERIS was named as a nominal defendant in the action. The case is captioned St. Lucie County Fire District Firefighters’ Pension Trust Fund v. Rosebrough, Jr., et al., Case No. CV 14 837749 (the "Action"). On September 28, 2015, the defendants reached an agreement in principle with plaintiff, regarding a settlement of the Action, and that agreement is reflected in a memorandum of understanding. In connection with the contemplated settlement, Old STERIS agreed to make certain additional disclosures related to the make-whole payments, which disclosures were reported on Old STERIS's Form 8-K dated September 28, 2015, and also agreed not to grant any new stock compensation subject to
Section 4985 of the Internal Revenue Code to any of the individual defendants in the Action until six months following the closing date of the Combination. The parties have subsequently entered into and executed a stipulation of settlement, on a combined class and derivative basis, including agreement on a maximum fee/expense award to plaintiff's counsel. The stipulation of settlement, which is subject to customary conditions including approval of the Court following notice and hearing, has been filed with the Court along with a request for preliminary approval and the setting of a hearing date. The Court has not yet acted on the request. There can be no assurance that the Court will approve the proposed settlement and the settlement agreement may be terminated if Court approval is not obtained.

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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2016 and 2015
(dollars in thousands)



Other civil, criminal, regulatory or other proceedings involving our products or services could possibly result in judgments, settlements or administrative or judicial decrees requiring us, among other actions, to pay damages or fines or effect recalls, or be subject to other governmental, Customer or other third party claims or remedies, which could materially effect our business, performance, prospects, value, financial condition, and results of operations.
For additional information regarding these matters, see the following portions of our Annual Report on Form 10-K for the year ended March 31, 2016 dated May 31, 2016: “Business - Information with respect to our Business in General - Government Regulation”, and the “Risk Factor” titled “We may be adversely affected by product liability claims or other legal actions or regulatory or compliance matters.
From time to time, STERIS is also involved in legal proceedings as a plaintiff involving contract, patent protection, and other claims asserted by us. Gains, if any, from these proceedings are recognized when they are realized.
We are subject to taxation from United States federal, state and local, and foreign jurisdictions. Tax positions are settled primarily through the completion of audits within each individual jurisdiction or the closing of statutes of limitation. Changes in applicable tax law or other events may also require us to revise past estimates. We describe income taxes further in note 7 to our consolidated financial statements titled, “Income Taxes” in this Quarterly Report on Form 10-Q.
Additional information regarding our contingencies is included in Item 2 titled, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations under "Contingencies".



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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2016 and 2015
(dollars in thousands)




10. Business Segment Information

We operate and report in four reportable business segments: Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies. Corporate and other, which is presented separately, contains the Defense and Industrial business unit plus costs that are associated with being a publicly traded company and certain other corporate costs.
Our Healthcare Products segment offers infection prevention and procedural solutions for healthcare providers worldwide, including capital equipment and related maintenance and installation services, as well as consumables.
Our Healthcare Specialty Services segment provides a range of specialty services for healthcare providers including hospital sterilization services, instrument and scope repairs, and linen management.
Our Life Sciences segment offers capital equipment and consumable products, and equipment maintenance and specialty services for pharmaceutical manufacturers and research facilities.
Our Applied Sterilization Technologies segment offers a contract sterilization and laboratory services for medical device and pharmaceutical Customers and others.
The accounting policies for reportable segments are the same as those for the consolidated Company. Management evaluates performance and allocates resources based on a segment operating income measure. Operating income (loss) for each segment is calculated as the segment’s gross profit less direct expenses and indirect cost allocations, which result in the full allocation of all distribution and research and development expenses, and the partial allocation of corporate costs. These allocations are based upon variables such as segment headcount and revenues. In addition, the Healthcare Products segment is responsible for the management of all but two manufacturing facilities and uses standard cost to sell products to the other segments. Corporate and other includes the gross profit and direct expenses of the Defense and Industrial business unit, as well as certain unallocated corporate costs related to being a publicly traded company and legacy pension and post-retirement benefits. Segment operating income excludes certain adjustments which include acquisition related costs, amortization of acquired intangibles, restructuring costs and other charges that management believes may or may not recur with similar materiality or impact on operating income in future periods. Management believes that by excluding these items they gain better insight and greater transparency of the operating performance of the segments, thus aiding them in more meaningful financial trend analysis and operational decision making
For the three month period ended June 30, 2016, revenues from a single Customer did not represent ten percent or more of any reportable segment’s revenues. Additional information regarding our segments is included in our consolidated financial statements included in its Annual Report on Form 10-K for the year ended March 31, 2016, dated May 31, 2016.

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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2016 and 2015
(dollars in thousands)



Financial information for each of our segments is presented in the following tables:
 
 
 
Three Months Ended June 30,
 
 
2016
 
2015
Revenues:
 
 
 
 
Healthcare Products
 
$
281,298

 
$
261,086

Healthcare Specialty Services
 
157,888

 
68,241

Life Sciences
 
81,189

 
56,772

Applied Sterilization Technologies
 
116,573

 
53,689

Corporate and other
 
1,430

 
114

Total revenues
 
$
638,378

 
$
439,902

Segment operating income:
 
 
 
 
Healthcare Products
 
$
34,637

 
$
29,350

Healthcare Specialty Services
 
3,318

 
3,900

Life Sciences
 
24,462

 
13,450

Applied Sterilization Technologies
 
39,603

 
16,543

Corporate and other
 
(496
)
 
(1,898
)
Total segment operating income
 
$
101,524

 
$
61,345

Less: Adjustments
 
 
 
 
Restructuring charges (1)
 
$
154

 
$
(449
)
Amortization of acquired intangible assets (2)
 
19,529

 
6,021

Acquisition, divestiture and integration related charges (3)
 
5,233

 
11,546

Amortization of inventory and property "step up" to fair value (2)
 
3,086

 
11

Total operating income
 
$
73,522

 
$
44,216

(1) See Note 2 to our Consolidated Financial Statements titled, "Restructuring" for more information related to restructuring.
(2) For more information regarding our recent acquisitions see Note 18 titled, "Business Acquisitions", as well as our Annual Report on Form 10-K for the year ended March 31, 2016, dated May 31, 2016.
(3) Acquisition, divestiture and integration related charges include transaction costs and integration expenses associated with acquisitions and divestitures.


11. Shares and Preferred Shares

Common and Ordinary

We calculate basic earnings per share based upon the weighted average number of shares outstanding. We calculate diluted earnings per share based upon the weighted average number of shares outstanding plus the dilutive effect of share equivalents calculated using the treasury stock method. The following is a summary of shares and share equivalents outstanding used in the calculations of basic and diluted earnings per share:
 
 
 
Three Months Ended June 30,
 
 
2016
 
2015
Denominator (shares in thousands):
 
 
 
 
Weighted average shares outstanding—basic
 
86,038

 
59,768

Dilutive effect of share equivalents
 
481

 
518

Weighted average shares outstanding and share equivalents—diluted
 
86,519

 
60,286



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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2016 and 2015
(dollars in thousands)



Options to purchase the following number of shares were outstanding but excluded from the computation of diluted earnings per share because the combined exercise prices, unamortized fair values, and assumed tax benefits upon exercise were greater than the average market price for the shares during the periods, so including these options would be anti-dilutive:
 
 
 
Three Months Ended June 30,
 
 
2016
 
2015
(shares in thousands)
 
 
Number of share options
 
364

 
52


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


12. Repurchases of Shares

During the first quarter of fiscal 2017, we obtained 104,626 of our ordinary shares in connection with share based compensation award programs.


13. Share-Based Compensation

We maintain a long-term incentive plan that makes available shares for grants, at the discretion of the Compensation Committee of the Board of Directors, to officers, directors, and key employees in the form of stock options, restricted shares, restricted share units, stock appreciation rights and share grants.

Stock options provide the right to purchase our shares at the market price on the date of grant, subject to the terms of the option plans and agreements. Generally, one-fourth of the stock options granted become exercisable for each full year of employment following the grant date. Stock options granted generally expire 10 years after the grant date, or in some cases earlier if the option holder is no longer employed by us. Restricted shares and restricted share units generally may cliff vest after a four year period or vest in tranches of one-fourth of the number granted for each full year of employment after the grant date. As of June 30, 2016, 1,613,977 shares remained available for grant under the long-term incentive plan.

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





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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2016 and 2015
(dollars in thousands)



The following weighted-average assumptions were used for options granted during the first three months of fiscal 2017 and fiscal 2016:
 
 
 
Fiscal 2017
 
Fiscal 2016
Risk-free interest rate
 
1.29
%
 
1.46
%
Expected life of options
 
5.5 years

 
5.6 years

Expected dividend yield of stock
 
1.55
%
 
1.40
%
Expected volatility of stock
 
22.78
%
 
24.74
%

The risk-free interest rate is based upon the U.S. Treasury yield curve. The expected life of options is reflective of historical experience, vesting schedules and contractual terms. The expected dividend yield of stock represents our best estimate of the expected future dividend yield. The expected volatility of stock is derived by referring to our historical stock prices over a time frame similar to that of the expected life of the grant. An estimated forfeiture rate of 1.85% and 1.55% was applied in fiscal 2017 and 2016, respectively. This rate is calculated based upon historical activity and represents an estimate of the granted options not expected to vest. If actual forfeitures differ from this calculated rate, we may be required to make additional adjustments to compensation expense in future periods. The assumptions used above are reviewed at the time of each significant option grant, or at least annually.

A summary of share option activity is as follows:
 
 
 
Number of
Options
 
Weighted
Average
Exercise
Price
 
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Outstanding at March 31, 2016
 
1,729,517

 
$
44.01

 
 
 
 
Granted
 
370,212

 
69.72

 
 
 
 
Exercised
 
(18,131
)
 
29.95

 
 
 
 
Forfeited
 
(2,703
)
 
59.41

 
 
 
 
Canceled
 

 

 
 
 
 
Outstanding at June 30, 2016
 
2,078,895

 
$
48.69

 
6.7 years
 
$
42,065

Exercisable at June 30, 2016
 
1,238,705

 
$
38.35

 
5.2 years
 
$
37,658


We estimate that 816,670 of the non-vested stock options outstanding at June 30, 2016 will ultimately vest.

The aggregate intrinsic value in the table above represents the total pre-tax difference between the $68.75 closing price of our ordinary shares on June 30, 2016 over the exercise prices of the stock options, multiplied by the number of options outstanding or outstanding and exercisable, as applicable. The aggregate intrinsic value is not recorded for financial accounting purposes and the value changes daily based on the daily changes in the fair market value of ordinary shares.

The total intrinsic value of stock options exercised during the first three months of fiscal 2017 and fiscal 2016 was $727 and $5,582, respectively. Net cash proceeds from the exercise of stock options were $758 and $4,881 for the first three months of fiscal 2017 and fiscal 2016, respectively.

The weighted average grant date fair value of stock option grants was $13.15 and $14.11 for the first three months of fiscal 2017 and fiscal 2016, respectively.

Stock appreciation rights (“SARS”) carry generally the same terms and vesting requirements as stock options except that they are settled in cash upon exercise and therefore, are classified as liabilities. The fair value of the outstanding SARS as of June 30, 2016 and 2015 was $1,857 and $1,966, respectively.





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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2016 and 2015
(dollars in thousands)



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, 2016
 
872,972

 
41,641

 
$
51.98

Granted
 
219,167

 
9,390

 
69.77

Vested
 
(186,856
)
 
(10,589
)
 
38.74

Canceled
 
(10,722
)
 
(2,275
)
 
60.54

Non-vested at June 30, 2016
 
894,561

 
38,167

 
$
59.02


Restricted shares granted are valued based on the closing stock price at the grant date. The value of restricted shares that vested during the first three months of fiscal 2017 was $7,087.

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

The tax benefit from share-based compensation was $2,440 and $3,910 for the first three months of fiscal 2017 and fiscal 2016, respectively.

As of June 30, 2016, there was a total of $47,882 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 2.45 years.

14. Financial and Other Guarantees

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

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

Warranties issued during the period
2,742

Settlements made during the period
(2,795
)
Balance, June 30, 2016
$
5,856


We also sell product maintenance contracts to our Customers. These contracts range in terms from one to five years and require us to maintain and repair the product over the maintenance contract term. We initially record amounts due from Customers under these contracts as a liability for deferred service contract revenue on the accompanying Consolidated Balance Sheets within “Accrued expenses and other.” The liability recorded for such deferred service revenue was $32,953 and $33,416 as of June 30, 2016 and March 31, 2016, respectively. Such deferred revenue is then amortized on a straight-line basis over the contract term and recognized as service revenue on our accompanying Consolidated Statements of Income. The activity related to the liability for deferred service contract revenue is excluded from the table presented above.

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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2016 and 2015
(dollars in thousands)




15. Derivatives and Hedging

From time to time, we enter into forward contracts to hedge potential foreign currency gains and losses that arise from transactions denominated in foreign currencies, including inter-company transactions. We may also enter into commodity swap contracts to hedge price changes in nickel that impact raw materials included in our cost of revenues. We do not use derivative financial instruments for speculative purposes. These contracts are not designated as hedging instruments and do not receive hedge accounting treatment; therefore, changes in their fair value are not deferred but are recognized immediately in the Consolidated Statements of Income. At June 30, 2016, we held foreign currency forward contracts to buy 90.0 million Mexican pesos, 4.0 million British pounds sterling, 3.5 million euros, and 8.0 million Canadian dollars. At June 30, 2016 we held commodity swap contracts to buy 499.0 thousand pounds of nickel.
 
 
Asset Derivatives
 
Liability Derivatives
Balance Sheet
 
Fair Value at
 
Fair Value at
 
Fair Value at
 
Fair Value at
Location
 
June 30, 2016
 
March 31, 2016
 
June 30, 2016
 
March 31, 2016
Prepaid & Other
 
$
351

 
$
145

 
$

 
$

Accrued expenses and other
 
$

 
$

 
$
293

 
$
122


The following table presents the impact of derivative instruments and their location within the Consolidated Statements of Income:
 
 
 
Location of gain (loss)
recognized in income
 
Amount of gain (loss) recognized in income
Three Months Ended June 30,
2016
 
2015
Foreign currency forward contracts
 
Selling, general and administrative
 
$
(1,019
)
 
$
432

Commodity swap contracts
 
Cost of revenues
 
$
211

 
$
(45
)

Additionally, we hold our debt in multiple currencies to fund our operations and investments in certain subsidiaries. We designate portions of foreign currency denominated intercompany loans as hedges of portions of net investments in foreign operations. Net debt designated as non-derivative net investment hedging instruments totaled $123,811 at June 30, 2016. These hedges are designed to be fully effective and any associated gain or loss is recognized in Accumulated Other Comprehensive Income and will be reclassified to income in the same period when a gain or loss related to the net investment in the foreign operation is included in income.


16. Fair Value Measurements

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









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STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2016 and 2015
(dollars in thousands)



The following table shows the fair value of our financial assets and liabilities at June 30, 2016 and March 31, 2016:
 
 
 
 
 
 
Fair Value Measurements at June 30, 2016 and March 31, 2016 Using
 
 
Carrying Value
 
Quoted Prices
in Active Markets
for Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
 
 
Level 1
 
Level 2
 
Level 3
June 30
March 31
June 30
March 31
 
June 30
March 31
 
June 30
March 31
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (1)
 
$
242,423

$
248,841

 
$
217,246

$
225,090

 
$
25,177

$
23,751

 
$

$

Forward and swap contracts (2)
 
351

145

 


 
351

145

 


Investments (3)
 
10,148

6,192

 
10,148

6,192

 


 


Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Forward and swap contracts (2)
 
$
293

$
122

 
$

$

 
$
293

$
122

 
$

$

Deferred compensation plans (3)
 
1,703

1,765

 
1,703

1,765

 


 


Long term debt (4)
 
1,551,838

1,567,796

 


 
1,601,514

1,592,184

 


Contingent consideration obligations (5)
 
5,956

5,886

 


 


 
5,956

5,886


(1) Money market fund holdings are classified as level two as active market quoted prices are not available.
(2) The fair values of forward and swap contracts are based on period-end forward rates and reflect the value of the amount that we would pay or receive for the contracts involving the same notional amounts and maturity dates.
(3) We maintain a frozen domestic non-qualified deferred compensation plan covering certain employees, which allows for the deferral of payment of previously earned compensation for an employee-specified term or until retirement or termination. Amounts deferred can be allocated to various hypothetical investment options (compensation deferrals have been frozen under the plan). We hold investments to satisfy the future obligations of the plan. Changes in the value of the investment accounts are recognized each period based on the fair value of the underlying investments. Employees who made deferrals are entitled to receive distributions of their hypothetical account balances (amounts deferred, together with earnings (losses)). We also hold an investment in the common stock of Servizi Italia, S.p.A, a leading provider of integrated linen washing and outsourced sterile processing services to hospital Customers including an incremental investment of $4,564 made in April 2016. Changes in the value of the investment are recognized each period based on the fair value of the investment.
(4) We estimate the fair value of our principal amount of long-term debt using discounted cash flow analyses, based on our current incremental borrowing rates for similar types of borrowing arrangements.
(5) Contingent consideration obligations arise from prior business acquisitions. The fair values are based on discounted cash flow analyses reflecting the possible achievement of specified performance measures or events and captures the contractual nature of the contingencies, commercial risk, and the time value of money. Contingent consideration obligations are classified in the consolidated balance sheets as accrued expense (short-term) and other liabilities (long-term), as appropriate based on the contractual payment dates.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis at June 30, 2016 are summarized as follows:
 
Contingent Consideration
Balance at March 31, 2016
$
5,886

Additions

Payments

Foreign currency translation adjustments (1)
70

Balance at June 30, 2016
$
5,956

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


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Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2016 and 2015
(dollars in thousands)



Information regarding our investments is as follows:
 
 
 
 
 
 
Investments at June 30, 2016 and March 31, 2016
 
 
Cost
 
Unrealized Gains
 
Unrealized Losses (2)
 
Fair Value
 
 
 
 
 
 
 
 
June 30
 
March 31
June 30
 
March 31
 
June 30
 
March 31
 
June 30
 
March 31
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable equity securities (1)
 
$
9,245

 
$
4,681

 
$

 
$

 
$
(721
)
 
$
(185
)
 
$
8,524

 
$
4,496

Mutual funds
 
1,206

 
1,289

 
418

 
407

 

 

 
1,624

 
1,696

Total available-for-sale securities
 
$
10,451

 
$
5,970

 
$
418

 
$
407

 
$
(721
)
 
$
(185
)
 
$
10,148

 
$
6,192

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


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

Amounts in Accumulated Other Comprehensive Income (Loss) are presented net of the related tax. Foreign Currency Translation is not adjusted for income taxes. Changes in our Accumulated Other Comprehensive Income (Loss) balances, net of tax, for the three months ended June 30, 2016 were as follows:

 
Gain (Loss) on Available for Sale Securities (1)
 
Defined Benefit Plans (2)
 
Foreign Currency Translation (3)
 
Total Accumulated Other Comprehensive Income
(Loss)
Balance at March 31, 2016
$
(673
)
 
$
5,108

 
$
(72,594
)
 
$
(68,159
)
Other Comprehensive Income (Loss) before reclassifications
(148
)
 
103

 
(17,049
)
 
(17,094
)
Amounts reclassified from Accumulated Other Comprehensive Income (Loss)
28

 
(493
)
 

 
(465
)
Net current-period Other Comprehensive Income (Loss)
(120
)
 
(390
)
 
(17,049
)
 
(17,559
)
Balance at June 30, 2016
$
(793
)
 
$
4,718

 
$
(89,643
)
 
$
(85,718
)

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

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


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Table of Contents
STERIS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)—(Continued)
For the Three Months Ended June 30, 2016 and 2015
(dollars in thousands)



18. Business Acquisitions
Synergy Health plc
On November 2, 2015, STERIS acquired all outstanding shares of Synergy in a cash and stock transaction valued at £24.80 ($38.17) per Synergy share, or a total of approximately $2.3 billion based on the low trading price of Old STERIS’s stock of $73.02 per share on November 2, 2015. Total costs of approximately $200 before tax were incurred during the first three months of fiscal year 2017 related to the Combination and are reported in selling, general and administrative expense.
Total consideration for the transaction is presented in the table below. At the closing date of the Combination, vested share option awards remained outstanding under Synergy's Save As You Earn Plans ("SAYE"). In accordance with the provisions of SAYE, vested option awards may be exercised to the extent that the exercise price funds have been accumulated in accordance with the option holder's savings contract. The number of Synergy shares that are expected to be issued have been fair valued based on the same cash and stock consideration available to other Synergy shareholders at the time of the Combination.
Cash consideration
$
402,494

STERIS plc shares (25,848,798 ordinary shares issued)
1,887,479

Fair value of consideration available to vested Synergy share option holders
4,819

Total purchase consideration
$
2,294,792

The acquisition of Synergy has been accounted for using the acquisition method of accounting which requires, among other things, the assets acquired, liabilities assumed and noncontrolling interests be recognized at their respective fair values as of the acquisition date. Acquisition accounting is dependent upon certain valuations and other studies that are in progress and are not yet to a stage where there is sufficient information for a definitive measurement. The process for estimating the fair values of identifiable intangible assets and certain tangible assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates.
The purchase price allocation for Synergy is preliminary. As we finalize the fair values of assets acquired, liabilities assumed, and noncontrolling interests, additional purchase price adjustments will be recorded during the measurement period. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations. The finalization of the purchase accounting assessment will result in changes in the valuation of assets acquired and liabilities assumed and may have a material impact on the our results of operations and financial position. Goodwill will be allocated to the Healthcare Products, Healthcare Specialty Services, and Applied Sterilization Technologies segments. Goodwill is the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined company and assembled workforce, which are further described above. Goodwill recognized as a result of the acquisition is not deductible for tax purposes.

19. Subsequent Events

On July 1, 2016 we sold our UK Linen Management Services business to STAR Mayan Limited for approximately £50.0 million. For fiscal year 2017, the UK Linen Management Services business was expected to generate approximately £40.0 million in revenue. The UK Linen Management Services business was part of our Healthcare Specialty Services segment.

On July 22, 2016 we acquired Medisafe Holdings Ltd, a U.K. manufacturer of washer/disinfector equipment and related consumables and services for approximately £27.0 million. On an annual basis, the Medisafe product line generates approximately £14.0 million in revenue. The acquisition of Medisafe provides washer manufacturing and research and development in the U.K., and Medisafe's products and services complement our Healthcare product offering. Medisafe will be integrated into our Healthcare Product segment.
    



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Report of Independent Registered Public Accounting Firm


Board of Directors and Shareholders of STERIS plc


We have reviewed the consolidated balance sheet of STERIS plc and subsidiaries (“STERIS”) as of June 30, 2016, and the related consolidated statements of income, comprehensive income and cash flows for the three-month periods ended June 30, 2016 and 2015. These financial statements are the responsibility of the Company's management.

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

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

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






/s/ Ernst & Young LLP



Cleveland, Ohio
August 9, 2016



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Table of Contents


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

Introduction

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

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

Financial Measures

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

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

Revenues – Defined

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

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Table of Contents

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

General Company Overview and Executive Summary
STERIS plc, a public limited company organized under the laws of England and Wales, was incorporated on October 9, 2014 as a private limited company under the name New STERIS Limited and was re-registered effective November 2, 2015 as a public limited company under the name STERIS plc. New STERIS Limited was established to effect the combination (“Combination”) of STERIS Corporation, an Ohio corporation (“Old STERIS”), and Synergy Health plc, a public limited company organized under the laws of the England and Wales (“Synergy”). This Combination closed on November 2, 2015 and as a result STERIS plc became the ultimate parent company of Old STERIS and Synergy. Synergy has been re-registered under the name Synergy Health Limited. The Combination was accounted for in the consolidated financial statements as a merger between entities under common control; accordingly the historical consolidated financial statements of Old STERIS for periods prior to November 2, 2015 are considered to be the historical financial statements of STERIS plc.
Due to the timing of the closing of the Combination, the results of Synergy are only reflected in the results of operations of the Company from November 2, 2015 forward, which will affect comparability to the prior period historical operations of the Company throughout this quarterly report on Form 10-Q.
As a result of the Combination, we have reorganized our operations into four reportable business segments: Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies. We describe our business segments in note 10 to our consolidated financial statements titled, “Business Segment Information.”
Our mission is to help our Customers create a healthier and safer world by providing innovative healthcare and life science product and service solutions around the globe. Our dedicated employees around the world work together to supply a broad range of solutions by offering a combination of capital equipment, consumables, medical devices and services to healthcare, pharmaceutical, industrial, and governmental Customers.
The bulk of our revenues are derived from the healthcare and pharmaceutical industries. Much of the growth in these industries is driven by the aging of the population throughout the world, as an increasing number of individuals are entering their prime healthcare consumption years, and is dependent upon advancement in healthcare delivery, acceptance of new technologies, government policies, and general economic conditions. In addition, each of our core industries is experiencing specific trends that could increase demand. Within healthcare, there is increased concern regarding the level of hospital-acquired infections around the world. The pharmaceutical industry has been impacted by increased FDA scrutiny of cleaning and validation processes, mandating that manufacturers improve their processes. The aging population increases the demand for medical procedures, which increases the consumption of single use medical devices and surgical kits processed by our Applied Sterilization Technologies segment.
We are actively pursuing new opportunities to adapt our proven technologies to meet the changing needs of the global marketplace. We are also pursuing a strategy of expanding into adjacent markets by seeking acquisition targets in the Healthcare Products, Healthcare Specialty Services and Life Sciences segments.
Fiscal 2017 first quarter revenues were $638.4 million, representing an increase of 45.1% over the fiscal 2016 first quarter revenues of $439.9 million, reflecting growth within all reportable business segments including growth resulting from the Combination.


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Fiscal 2017 first quarter gross margin percentage was 37.6% compared with 41.8% for the fiscal 2016 first quarter. As anticipated, the addition of Synergy's hospital sterilization services and linen management businesses is a key factor in the declines in gross margin percentages. Gross margin percentages in the first quarter of fiscal 2017 were favorably impacted by favorable currency movements and the suspension of the Medical Device excise tax.
Fiscal 2017 first quarter operating income was $73.5 million, compared to fiscal 2016 first quarter operating income of $44.2 million. The year over year increase is attributable to recent acquisitions, including the Combination, along with growth in all reportable business segments.

Cash flows from operations were $80.3 million and free cash flow was $49.5 million in the first three months of fiscal 2017 compared to cash flows from operations of $41.2 million and free cash flow $17.7 million in the first three months of fiscal 2016, respectively (see the subsection below titled "Non-GAAP Financial Measures") for additional information and related reconciliation of cash flows from operations to free cash flow). The higher cash flow from operations and free cash flow as compared to the prior year period are primarily due to higher net income. Our debt-to-total capital ratio was 33.8% at June 30, 2016 and 34.2% at March 31, 2016. During the first three months of fiscal 2017, we declared and paid quarterly cash dividends of $0.25 per ordinary share.
Additional information regarding our fiscal 2017 first quarter financial performance is included in the subsection below titled “Results of Operations.”

Matters Affecting Comparability

International Operations. Since we conduct operations outside of the United States using various foreign currencies, our operating results are impacted by foreign currency movements relative to the U.S. dollar. During the first quarter of fiscal 2017, our revenues were unfavorably impacted by $1.8 million, or 0.4%, and income before taxes was favorably impacted by $2.8 million, or 5.5%, as a result of foreign currency movements relative to the U.S. dollar.

NON-GAAP FINANCIAL MEASURES
We, at times, refer to financial measures which are considered to be “non-GAAP financial measures” under SEC rules. We, at times, also refer to our results of operations excluding certain transactions or amounts that are non-recurring or are not indicative of future results, in order to provide meaningful comparisons between the periods presented.
These non-GAAP financial measures are not intended to be, and should not be, considered separately from or as an alternative to the most directly comparable GAAP financial measures.
These non-GAAP financial measures are presented with the intent of providing greater transparency to supplemental financial information used by management and the Board of Directors in their financial analysis and operational decision-making. These amounts are disclosed so that the reader has the same financial data that management uses with the belief that it will assist investors and other readers in making comparisons to our historical operating results and analyzing the underlying performance of our operations for the periods presented.
We believe that the presentation of these non-GAAP financial measures, when considered along with our GAAP financial measures and the reconciliation to the corresponding GAAP financial measures, provide the reader with a more complete understanding of the factors and trends affecting our business than could be obtained absent this disclosure. It is important for the reader to note that the non-GAAP financial measure used may be calculated differently from, and therefore may not be comparable to, a similarly titled measure used by other companies.
We define free cash flow as net cash provided by operating activities as presented in the Consolidated Statements of Cash Flows less purchases of property, plant, equipment, and intangibles plus proceeds from the sale of property, plant, equipment, and intangibles, which are also presented in the Consolidated Statements of Cash Flows. We use this as a measure to gauge our ability to fund future debt principal repayments, growth outside of core operations, repurchase shares, and pay cash dividends. The following table summarizes the calculation of our free cash flow for the three month periods ended June 30, 2016 and 2015: 
 
 
Three Months Ended June 30,
(dollars in thousands)
 
2016
 
2015
Net cash provided by operating activities
 
$
80,316

 
$
41,153

Purchases of property, plant, equipment and intangibles, net
 
(35,357
)
 
(23,518
)
Proceeds from the sale of property, plant, equipment and intangibles
 
4,526

 
28

Free cash flow
 
$
49,485

 
$
17,663


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Table of Contents


Results of Operations

In the following subsections, we discuss our earnings and the factors affecting them for the first quarter of fiscal 2017 compared with the same fiscal 2016 period. We begin with a general overview of our operating results and then separately discuss earnings for our operating segments.

Revenues. The following table compares our revenues for the three months ended June 30, 2016 to the revenues for the three months ended June 30, 2015:
 
 
Three Months Ended June 30,
 
  
 
 
 
(dollars in thousands)
2016
 
2015
 
Change
 
Percent Change
 
 
 
 
 
 
 
 
 
 
Total revenues
$
638,378

 
$
439,902

 
$
198,476

 
45.1
%
 
 
 
 
 
 
 
 
 
 
Revenues by type:
 
 
 
 
 
 
 
 
Capital equipment revenues
126,085

 
118,220

 
7,865

 
6.7
%
 
Consumable revenues
145,665

 
114,087

 
31,578

 
27.7
%
 
Service revenues
366,628

 
207,595

 
159,033

 
76.6
%
 
 
 
 
 
 
 
 
 
 
Revenues by geography:
 
 
 
 
 
 
 
 
United Kingdom revenues
70,439

 
10,168

 
60,271

 
592.8
%
 
United States revenues
428,105

 
360,469

 
67,636

 
18.8
%
 
Other foreign revenues
139,834

 
69,265

 
70,569

 
101.9
%
 

Revenues increased $198.5 million, or 45.1%, to $638.4 million for the quarter ended June 30, 2016, as compared to $439.9 million for the same quarter in the prior year. This increase is attributable to recent acquisitions including the Combination with Synergy along with growth in all reportable business segments. Recent acquisitions contributed 39.3% and impacted all three revenue types.

Capital equipment revenues increased 6.7% in the first quarter of fiscal 2017, as compared to the first quarter of fiscal 2016. Most of the capital equipment revenues increase was in the United States although revenues also increased in the EMEA and Asia Pacific regions. Consumable revenues increased 27.7% for the quarter ended June 30, 2016, as compared to the prior year quarter, due to recent acquisitions, along with strong growth in both the Healthcare Products and Life Sciences segments. Recent acquisitions contributed 18.4% of the consumable revenues increase. Service revenues increased 76.6% in the first quarter of fiscal 2017 driven by the Combination with Synergy and organic growth in all reportable business segments.
 
United Kingdom revenues increased $60.3 million, or 592.8%, to $70.4 million for the quarter ended June 30, 2016, as compared to $10.2 million for the same prior year quarter. This increase reflects growth in both consumable and service revenues and is primarily attributable to the Combination with Synergy.
United States revenues increased $67.6 million, or 18.8%, to $428.1 million for the quarter ended June 30, 2016, as compared to $360.5 million for the same prior year quarter. This increase reflects year over year growth of 6%, 19% and 24% in capital equipment, consumable and service revenues, respectively. The increases are attributable to acquisitions, including the Combination with Synergy, as well as organic growth.

Revenue from other foreign locations increased $70.6 million, or 101.9%, to $139.8 million for the quarter ended June 30, 2016, as compared to $69.3 million for the same prior year quarter. This increase reflects growth in the EMEA outside of the United Kingdom, as well as in the Asia Pacific and Latin American regions. The Combination with Synergy was a significant driver of the growth in the EMEA outside of the United Kingdom.

Revenues by segment are further discussed in the section of the MD&A titles, "Business Segment Results of Operations."



29

Table of Contents

Gross Profit. The following table compares our gross profit for the three months ended June 30, 2016 to the three months ended June 30, 2015:
 
 
 
Three Months Ended June 30,
 
Change
 
Percent
Change
(dollars in thousands)
 
2016
 
2015
 
Gross profit:
 
 
 
 
 
 
 
 
Product
 
$
129,052

 
$
102,451

 
$
26,601

 
26.0
%
Service
 
110,938

 
81,639

 
29,299

 
35.9
%
Total gross profit
 
$
239,990

 
$
184,090

 
$
55,900

 
30.4
%
Gross profit percentage:
 
 
 
 
 
 
 
 
Product
 
47.5
%
 
44.1
%
 
 
 
 
Service
 
30.3
%
 
39.3
%
 
 
 
 
Total gross profit percentage
 
37.6
%
 
41.8
%
 
 
 
 

Our gross margin percentage is affected by the volume, pricing, and mix of sales of our products and services, as well as the costs associated with the products and services that are sold. Gross margin increased $55.9 million and declined 420 basis points as a percentage of revenues in the fiscal 2017 first quarter as compared to the fiscal 2016 first quarter. The increase in product gross profit percentage is attributable to favorable foreign currency rate movements, the suspension of the Medical Device Excise Tax, and a shift towards higher margin consumable products. As anticipated, the addition of Synergy’s hospital sterilization services and linen management businesses is a key factor in the decline in the service gross profit percentage.

Operating Expenses. The following table compares our operating expenses for the three months ended June 30, 2016 to the three months ended June 30, 2015:
 
  
 
Three Months Ended June 30,
 
Change
 
Percent
Change
(dollars in thousands)
 
2016
 
2015
 
Operating expenses:
 
 
 
 
 
 
 
 
Selling, general, and administrative
 
$
151,886

 
$
126,835

 
$
25,051

 
19.8
%
Research and development
 
14,428

 
13,765

 
663

 
4.8
%
Restructuring expenses
 
154

 
(726
)
 
880

 
NM
Total operating expenses
 
$
166,468

 
$
139,874

 
$
26,594

 
19.0
%
NM - Not meaningful.

Selling, General, and Administrative Expenses. Significant components of total selling, general, and administrative expenses (“SG&A”) are compensation and benefit costs, fees for professional services, travel and entertainment, facilities costs, and other general and administrative expenses. SG&A increased 19.8% in the first quarter of fiscal 2017 over the first quarter of fiscal 2016.The increase is primarily attributable to amortization of acquired intangible assets, associated with recently acquired businesses, which was partially offset by a decrease in acquisition and integration costs related to recent acquisitions, including Synergy.
 
For the three month period ended June 30, 2016, research and development expenses increased 4.8% over the same prior year period. The increase in the fiscal 2017 three month period is primarily attributable to additional spending in connection with the development of healthcare and Life Sciences products and accessories. Research and development expenses are influenced by the number and timing of in-process projects and labor hours and other costs associated with these projects. Our research and development initiatives continue to emphasize new product development, product improvements, and the development of new technological platform innovations. During the first quarter of fiscal 2017, our investments in research and development continued to be focused on, but were not limited to, enhancing capabilities of sterile processing combination technologies, procedural products and accessories, and devices and support accessories used in gastrointestinal endoscopy procedures.



30

Table of Contents

Restructuring Expenses. During the fourth quarter of fiscal 2014, we adopted and announced a targeted restructuring plan primarily focused on the closure of our Hopkins manufacturing facility located in Mentor, Ohio (the “Fiscal 2014 Restructuring Plan”). As a result of this plan, we will transfer operations located at Hopkins to other North American locations. We believe that by closing the operations at Hopkins we will more effectively utilize our existing North American manufacturing network while reducing operating costs.
Since the inception of the Fiscal 2014 Restructuring Plan, we have incurred pre-tax expenses totaling $19.1 million related to these actions, of which $11.0 million was recorded as restructuring expenses and $8.1 million was recorded in cost of revenues. These actions are intended to enhance profitability and improve efficiencies. We do not expect to incur any significant additional restructuring expenses related to this plan.
The following table summarizes our total pre-tax restructuring expenses for the first quarter of fiscal 2017:
Three Months Ended June 30, 2016 (dollars in thousands)
Fiscal 2014
Restructuring
Plan
Lease termination obligation and other
$
154

Total restructuring expenses
$
154


The following table summarizes our total pre-tax restructuring expenses for the first quarter of fiscal 2016:
Three Months Ended June 30, 2015 (dollars in thousands)
Fiscal 2014
Restructuring
Plan (1)
Severance and other compensation related costs
$
(806
)
Lease termination obligation and other
80

Product rationalization
277

Total restructuring expenses
$
(449
)
(1) Includes $277 in expense recorded in cost of revenues on Consolidated Statements of Income.

Non-Operating Expenses, Net. Non-operating expenses, net consists of interest expense on debt, offset by interest earned on cash, cash equivalents, short-term investment balances, and other miscellaneous income. The following table compares our net non-operating expenses for the three months ended June 30, 2016 and 2015:
 
 
 
Three Months Ended June 30,
 
 
(dollars in thousands)
 
2016
 
2015
 
Change
Non-operating expenses, net:
 
 
 
 
 
 
Interest expense
 
$
11,071

 
$
6,120

 
$
4,951

Interest income and miscellaneous expense
 
(493
)
 
(482
)
 
(11
)
Non-operating expenses, net
 
$
10,578

 
$
5,638

 
$
4,940


Interest expense during fiscal 2017 increased due to higher interest costs resulting from our May 2015 issuance of senior notes in a private placement offering, additional borrowings under our credit facilities to fund acquisitions, including the Combination and the operations of acquired companies, and payments associated with paying off Synergy's debt. Year over year our weighted average cost of borrowing has decreased due to an increase in the proportion of lower-cost, variable-rate bank debt. Interest income and miscellaneous expense is immaterial.










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Income Tax Expense. The following table compares our income tax expense and effective income tax rates for the three months ended June 30, 2016 to the three months ended June 30, 2015:
 
 
 
Three Months Ended June 30,
 
Change
 
Percent
Change
(dollars in thousands)
 
2016
 
2015
 
Income tax expense
 
$
14,234

 
$
14,267

 
$
(33
)
 
(0.2)%
Effective income tax rate
 
22.6
%
 
37.0
%
 
 
 
 
 
The effective income tax rate for continuing operations for the three month period ended June 30, 2016 was 22.6% compared with 37.0% for the same prior year period. The first quarter of fiscal 2017 was favorably impacted by benefits achieved in conjunction with the Synergy transaction and the adoption of ASU 2016-09: "Stock Compensation: Improvements to Employee Share-Based Payment Accounting" (Topic 718).

We record income tax expense during interim periods based on our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. We analyze various factors to determine the estimated annual effective income tax rate, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and net operating loss carryforwards, and available tax planning alternatives.

Business Segment Results of Operations. As a result of the Combination with Synergy, we have reassessed the organization of our business. We have concluded that we operate and should report in four reportable business segments: Healthcare Products, Healthcare Specialty Services, Life Sciences, and Applied Sterilization Technologies. Corporate and other, which is presented separately, contains the Defense and Industrial business unit plus costs that are associated with being a publicly traded company and certain other corporate costs.
Our Healthcare Products segment offers infection prevention and procedural solutions for healthcare providers worldwide, including capital equipment and related maintenance and installation services, as well as consumables.
Our Healthcare Specialty Services segment provides a range of specialty services for healthcare providers including hospital sterilization services, instrument and scope repairs, and linen management.
Our Life Sciences segment offers capital equipment and consumable products, and equipment maintenance and specialty services for pharmaceutical manufacturers and research facilities.
Our Applied Sterilization Technologies segment offers a contract sterilization and laboratory services for medical device and pharmaceutical Customers and others.
The accounting policies for reportable segments are the same as those for the consolidated Company. Management evaluates performance and allocates resources based on a segment operating income measure. Operating income (loss) for each segment is calculated as the segment’s gross profit less direct expenses and indirect cost allocations, which result in the full allocation of all distribution and research and development expenses, and the partial allocation of corporate costs. These allocations are based upon variables such as segment headcount and revenues. In addition, the Healthcare Products segment is responsible for the management of all but two manufacturing facilities and uses standard cost to sell products to the other segments. Corporate and other includes the gross profit and direct expenses of the Defense and Industrial business unit, as well as certain unallocated corporate costs related to being a publicly traded company and legacy pension and post-retirement benefits. Segment operating income excludes certain adjustments which include acquisition related costs, amortization of acquired intangibles, restructuring costs and other charges that management believes may or may not recur with similar materiality or impact on operating income in future periods. Management believes that by excluding these items they gain better insight and greater transparency of the operating performance of the segments, thus aiding them in more meaningful financial trend analysis and operational decision making
For the three month period ended June 30, 2016, revenues from a single Customer did not represent ten percent or more of any reportable segment’s revenues. Additional information regarding our segments is included in our consolidated financial statements included in its Annual Report on Form 10-K for the year ended March 31, 2016, dated May 31, 2016.

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The following table compares business segment revenues, segment operating income and total operating income for the three months ended June 30, 2016 and 2015: 
 
 
Three Months Ended June 30,
 
 
2016
 
2015
Revenues:
 
 
 
 
Healthcare Products
 
$
281,298

 
$
261,086

Healthcare Specialty Services
 
157,888

 
68,241

Life Sciences
 
81,189

 
56,772

Applied Sterilization Technologies
 
116,573

 
53,689

Corporate and other
 
1,430

 
114

Total revenues
 
$
638,378

 
$
439,902

Segment operating income:
 
 
 
 
Healthcare Products
 
$
34,637

 
$
29,350

Healthcare Specialty Services
 
3,318

 
3,900

Life Sciences
 
24,462

 
13,450

Applied Sterilization Technologies
 
39,603

 
16,543

Corporate and other
 
(496
)
 
(1,898
)
Total segment operating income
 
$
101,524

 
$
61,345

Less: Adjustments
 
 
 
 
Restructuring charges (1)
 
$
154

 
$
(449
)
Amortization of acquired intangible assets (2)
 
19,529

 
6,021

Acquisition, divestiture and integration related charges (3)
 
5,233

 
11,546

Amortization of inventory and property "step up" to fair value (2)
 
3,086

 
11

Total operating income
 
$
73,522

 
$
44,216

(1) See Note 2 to our Consolidated Financial Statements titled, "Restructuring" for more information related to restructuring.
(2) For more information regarding our recent acquisitions see Note 10 titled, "Business Acquisitions", as well as our Annual Report on Form 10-K for the year ended March 31, 2016, dated May 31, 2016.
(3) Acquisition, divestiture and integration related charges include transaction costs and integration expenses associated with acquisitions
and divestitures.

Healthcare Product revenues increased 7.7% to $281.3 million for the quarter ended June 30, 2016, as compared to $261.1 million in the same prior year quarter. Fiscal 2017 first quarter revenues reflect an increase in consumable and service revenues of 20.4% and 3.5%, respectively. Capital equipment revenues were flat. These increases are primarily attributable to our Combination with Synergy and growth in the United States. At June 30, 2016, the Healthcare Products segment’s backlog amounted to $148.8 million, increasing $29.0 million, or 24.2%, compared to the backlog of $119.8 million at June 30, 2015.
Healthcare Specialty Services revenues increased 131.4% to $157.9 million for the quarter ended June 30, 2016, as compared to $68.2 million for the same prior year quarter. The increase is primarily attributable to our Combination with Synergy and organic revenue growth.

Life Sciences revenues increased 43.0% to $81.2 million for the quarter ended June 30, 2016, as compared to $56.8 million for the same prior year quarter. This growth reflects increases of 42.6%, 62.4% and 20.0% in capital equipment, consumable and service revenues, respectively. These increases in capital equipment, consumable and service revenues are primarily attributable to our recent acquisitions and strong organic growth. At June 30, 2016, the Life Sciences segment’s backlog amounted to $41.3 million, decreasing 15.1% or $7.3 million, compared to the backlog of $48.6 million at June 30, 2015.

Applied Sterilization Technologies segment revenues increased 117.1% to $116.6 million for the quarter ended June 30, 2016, as compared to $53.7 million for the same prior year quarter. Revenues were favorably impacted by our Combination with Synergy and increased volume from our core medical device Customers.



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The Healthcare Products segment’s operating income increased $5.3 million to $34.6 million for the first quarter of fiscal 2017 as compared to $29.4 million in the same prior year period. The segment's operating margin was 12.3% for the first quarter of fiscal 2017 compared to 11.2% for the first quarter of fiscal 2016. The increases in the fiscal 2017 periods reflect the positive impact of favorable foreign currency rate movements, the suspension of the medical device excise tax, volume, and productivity improvements.

The Healthcare Specialty Services segment’s operating income decreased by $0.6 million to $3.3 million for the first quarter of fiscal 2017. The segment's operating margins were 2.1% and 5.7% for the first quarter of fiscal 2017 and fiscal 2016, respectively. As anticipated, the addition of Synergy's hospital sterilization services and linen management services is a key factor in the operating margin decline.

The Life Sciences segment’s operating income increased to $24.5 million for the first quarter of fiscal 2017, as compared to $13.5 million in the same prior year period. The segment’s operating margins were 30.1% and 23.7% for the first quarter of fiscal 2017 and fiscal 2016, respectively. The increase was attributable to increased volume associated with both our recent business acquisitions and organic growth as well as favorable foreign currency rate movements.

The Applied Sterilization Technologies segment’s operating income increased to $39.6 million for the first quarter of fiscal 2017, as compared to $16.5 million the same prior year period. The segment’s operating margins were 34.0% and 30.8% for the first quarter of fiscal 2017 and fiscal 2016, respectively. The increase was primarily the result of increased volume both from our Combination with Synergy and increased demand from core medical device customers.

Liquidity and Capital Resources

The following table summarizes significant components of our cash flows for the three months ended June 30, 2016 and 2015:
 
 
 
Three Months Ended June 30,
(dollars in thousands)
 
2016
 
2015
Net cash provided by operating activities
 
$
80,316

 
$
41,153

Net cash used in investing activities
 
$
(35,645
)
 
$
(67,800
)
Net cash (used) provided by financing activities
 
$
(43,008
)
 
$
50,232

Debt-to-total capital ratio
 
33.8
%
 
38.5
%
Free cash flow
 
$
49,485

 
$
17,663


Net Cash Provided by Operating Activities – The net cash provided by our operating activities was $80.3 million for the first three months of fiscal 2017 as compared with $41.2 million for the first three months of fiscal 2016. The increase in cash flow from operations is primarily due to increased net income, partially offset by an increase in cash used to fund working capital requirements and higher year over year capital expenditures.

Net Cash Used In Investing Activities – The net cash used in investing activities totaled $35.6 million for the first three months of fiscal 2017 compared with $67.8 million for the first three months of fiscal 2016. The following discussion summarizes the significant changes in our investing cash flows for the first three months of fiscal 2017 and fiscal 2016:
 
Purchases of property, plant, equipment, and intangibles, net – Capital expenditures were $35.4 million for the first three months of fiscal 2017 as compared to $23.5 million during the same prior year period. The increase in capital expenditure in the fiscal 2017 period over the fiscal 2016 period is the result of the inclusion of capital expenditures related to the operations of Synergy and investments to expand capacity in certain of our Applied Sterilization Technologies facilities.

Investments in businesses, net of cash acquired – During the first three months of fiscal 2016, we used $44.3 million for acquisitions. For more information on our fiscal 2016 acquisitions refer to our Annual Report on Form 10-K for the year ended March 31, 2016, dated May 31, 2016.

Purchase of investments – During the first quarter of fiscal 2017, we invested an additional $4.6 million in common stock of Servizi Italia, S.p.A., a leading provider of integrated linen washing and outsourced sterile processing services to hospital Customers.


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Net Cash (Used In) Provided By Financing Activities – The net cash used by financing activities amounted to $43.0 million for the first three months of fiscal 2017 compared with net cash provided by financing activities of $50.2 million for the first three months of fiscal 2016. The following discussion summarizes the significant changes in our financing cash flows for the first three months of fiscal 2017 and fiscal 2016:

Proceeds from issuance of long-term obligations – On May 15, 2015, we issued $350.0 million aggregate principal amount of senior notes in a private placement, which are long-term obligations. Additional information regarding this indebtedness is included in the notes to our Annual Report on Form 10-K for the year ended March 31, 2016, dated May 31, 2016.
Deferred financing fees and debt issuance costs – During the first three months of fiscal 2017, no deferred financing fees or debt issuance costs were incurred. During the first three months of fiscal 2016, we paid $2.0 million in financing fees and debt issuance costs related to our Credit Agreement and private placement debt. Additional information regarding our indebtedness is included in the notes to our Annual Report on Form 10-K for the year ended March 31, 2016, dated May 31, 2016.
Payments on long-term obligations and credit facility, net – At June 30, 2016, we had $889.1 million of debt outstanding under our credit facilities, reflecting net payments of $16.1 million. At June 30, 2015, we had no debt outstanding under our revolving credit facility, reflecting net payments of $283.3 million.
Repurchases of shares – During the first three months of fiscal 2017, we obtained 104,626 of our shares in connection with share-based compensation award programs in the aggregate amount of $5.2 million. During the same period in fiscal 2016, we obtained 144,848 of our shares in connection with stock-based compensation award programs in the aggregate amount of $9.6 million.
Cash dividends paid to shareholders – During the first three months of fiscal 2017, we paid total cash dividends of $21.5 million, or $0.25 per outstanding share. During the first three months of fiscal 2016, we paid total cash dividends of $13.8 million, or $0.23 per outstanding share.
Stock option and other equity transactions, net – We generally receive cash for issuing shares under our stock option programs. During the first three months of fiscal 2017 and fiscal 2016, we received cash proceeds totaling $0.8 million and $4.9 million, respectively, under these programs.

Cash Flow Measures. Free cash flow was $49.5 million in the first three months of fiscal 2017 compared to $17.7 million in the prior year first three months (see the subsection above titled "Non-GAAP Financial Measures") for additional information and related reconciliation of cash flows from operations to free cash flow). The increase in free cash flow is primarily due to increased net income, partially offset by an increase in cash used to fund working capital requirements and higher year over year capital expenditures. Our debt-to-total capital ratio was 33.8% at June 30, 2016 and 38.5% at June 30, 2015.
Sources of Credit and Contractual and Commercial Commitments. Information related to our sources of credit and contractual and commercial commitments is included in our Annual Report on Form 10-K for the year ended March 31, 2016, dated May 31, 2016. Our commercial commitments were approximately $55.2 million at June 30, 2016 reflecting a net decrease of $1.4 million in surety bonds and other commercial commitments from March 31, 2016. We had $889.1 million of outstanding borrowings under the Credit Agreement as of June 30, 2016. There were no letters of credit outstanding under the Credit Agreement at June 30, 2016, but there were letters of credit outstanding under other arrangements at June 30, 2016.

Cash Requirements. We intend to use our existing cash and cash equivalent balances and cash generated from operations for short-term and long-term capital expenditures and our other liquidity needs. Our capital requirements depend on many uncertain factors, including our rate of sales growth, our Customers’ acceptance of our products and services, the costs of obtaining adequate manufacturing capacities, the timing and extent of our research and development projects, changes in our operating expenses and other factors. To the extent that existing and anticipated sources of cash are not sufficient to fund our future activities, we may need to raise additional funds through additional borrowings or the sale of equity securities. There can be no assurance that our existing financing arrangements will provide us with sufficient funds or that we will be able to obtain any additional funds on terms favorable to us or at all.


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Critical Accounting Policies, Estimates, and Assumptions

Information related to our critical accounting policies, estimates, and assumptions is included in our Annual Report on Form 10-K for the year ended March 31, 2016, dated May 31, 2016. Our critical accounting policies, estimates, and assumptions have not changed materially from March 31, 2016.

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 record a liability for such contingencies to the extent we conclude that their occurrence is both probable and estimable. We consider many factors in making these assessments, including the professional judgment of experienced members of management and our legal counsel. We have made estimates as to the likelihood of unfavorable outcomes and the amounts of such potential losses. In our opinion, the ultimate outcome of these proceedings and claims is not anticipated to have a material adverse affect on our consolidated financial position, results of operations, or cash flows. However, the ultimate outcome of proceedings, government investigations, and claims is unpredictable and actual results could be materially different from our estimates. We record expected recoveries under applicable insurance contracts when we are assured of recovery. Refer to note 9 of our consolidated financial statements titled, "Commitments and Contingencies" for additional information.
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 tax jurisdiction or the closing of a statute of limitation. Changes in applicable tax law or other events may also require us to revise past estimates. The IRS routinely conducts audits of our federal income tax returns.

International Operations

Since we conduct operations outside of the United States using various foreign currencies, our operating results are impacted by foreign currency movements relative to the U.S. dollar. During the first quarter of fiscal 2017, our revenues were unfavorably impacted by $1.8 million, or 0.4%, and income before taxes was favorably impacted by $2.8 million, or 5.5%, as a result of foreign currency movements relative to the U.S. dollar.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, that have or are reasonably likely to have, a material current or future impact on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital.

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Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain statements concerning certain trends, expectations, forecasts, estimates, or other forward-looking information affecting or relating to STERIS or its industry, products or activities that are intended to qualify for the protections afforded “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 and other laws and regulations. Forward-looking statements speak only as to the date specified in this Quarterly Report and may be identified by the use of forward-looking terms such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “projects,” “targets,” “forecasts,” “outlook,” “impact,” “potential,” “confidence,” “improve,” “optimistic,” “deliver,” “comfortable,” “trend”, and “seeks,” or the negative of such terms or other variations on such terms or comparable terminology. Many important factors could cause actual results to differ materially from those in the forward-looking statements including, without limitation, disruption of production or supplies, changes in market conditions, political events, pending or future claims or litigation, competitive factors, technology advances, actions of regulatory agencies, and changes in laws, government regulations, labeling or product approvals or the application or interpretation thereof. Other risk factors are described herein and in STERIS’s other securities filings, including Item 1A of STERIS’s Annual Report on Form 10-K for the year ended March 31, 2016. Many of these important factors are outside of STERIS’s control. No assurances can be provided as to any result or the timing of any outcome regarding matters described in this Quarterly Report or otherwise with respect to any regulatory action, administrative proceedings, government investigations, litigation, warning letters, cost reductions, business strategies, earnings or revenue trends or future financial results. References to products are summaries only and should not be considered the specific terms of the product clearance or literature. Unless legally required, STERIS does not undertake to update or revise any forward-looking statements even if events make clear that any projected results, express or implied, will not be realized. Other potential risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, (a) STERIS’s ability to meet expectations regarding the accounting and tax treatments of the Combination (the “Combination”) with STERIS Corporation and Synergy Health plc (“Synergy”), (b) the possibility that the parties may be unable to achieve expected synergies and operating efficiencies in connection with the Combination within the expected time-frames or at all and to successfully integrate the operations of the companies, (c) the integration of the operations of the companies being more difficult, time-consuming or costly than expected, (d) operating costs, customer loss and business disruption (including, without limitation, difficulties in maintaining relationships with employees, customers, clients or suppliers) being greater than expected following the transaction, (e) the retention of certain key employees of Synergy being difficult, (f) changes in tax laws or interpretations that could increase our consolidated tax liabilities, including, changes in tax laws that would result in STERIS being treated as a domestic corporation for United States federal tax purposes, (g) the potential for increased pressure on pricing or costs that leads to erosion of profit margins, (h) the possibility that market demand will not develop for new technologies, products or applications or services, or business initiatives will take longer, cost more or produce lower benefits than anticipated, (i) the possibility that application of or compliance with laws, court rulings, certifications, regulations, regulatory actions, including without limitation those relating to FDA, warning notices or letters, government investigations, the outcome of any pending FDA requests, inspections or submissions, or other requirements or standards may delay, limit or prevent new product introductions, affect the production and marketing of existing products or services or otherwise affect STERIS’s performance, results, prospects or value, (j) the potential of international unrest, economic downturn or effects of currencies, tax assessments, adjustments or anticipated rates, raw material costs or availability, benefit or retirement plan costs, or other regulatory compliance costs, (k) the possibility of reduced demand, or reductions in the rate of growth in demand, for STERIS’s products and services, (l) the possibility that anticipated growth, cost savings, new product acceptance, performance or approvals, or other results may not be achieved, or that transition, labor, competition, timing, execution, regulatory, governmental, or other issues or risks associated with STERIS’s businesses, industry or initiatives including, without limitation, those matters described in STERIS’s 10-K for the year ended March 31, 2016 and other securities filings, may adversely impact STERIS’s performance, results, prospects or value, (m) the impact on STERIS and its operations of the “Brexit,” (n) the possibility that anticipated financial results or benefits of recent acquisitions, including the Combination, or of STERIS’s restructuring efforts, or of recent divestitures, will not be realized or will be other than anticipated, and (o) the effects of contractions in credit availability, as well as the ability of STERIS’s Customers and suppliers to adequately access the credit markets when needed.

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Availability of Securities and Exchange Commission Filings

We make available free of charge on or through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports as soon as reasonably practicable after we file such material with, or furnish such material to, the Securities Exchange Commission ("SEC.") You may access these documents on the Investor Relations page of our website at http://www.steris-ir.com. The information on our website is not incorporated by reference into this report. You may also obtain copies of these documents by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, or by accessing the SEC’s website at http://www.sec.gov. You may obtain information on the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the ordinary course of business, we are subject to interest rate, foreign currency, and commodity risks. Information related to these risks and our management of these exposures is included in Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in our Annual Report on Form 10-K for the year ended March 31, 2016, dated May 31, 2016. Our exposures to market risks have not changed materially since March 31, 2016.

ITEM 4.
CONTROLS AND PROCEDURES

Under the supervision of and with the participation of our management, including the Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report. Based on that evaluation, including the assessment and input of our management, the PEO and PFO concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective.
In connection with the Combination with Synergy, we began implementing standards and procedures at Synergy, including upgrading and establishing controls over accounting systems and adding consultants who are trained and experienced in the preparation of financial statements in accordance with U.S. GAAP to ensure that we have in place appropriate internal controls over financial reporting at Synergy. These changes to the Company's internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934, that occurred during the quarter ended June 30, 2016 may materially affect, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


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PART II—OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS

Information regarding our legal proceedings is included in this Form 10-Q in note 9 to our consolidated financial statements titled, "Commitments and Contingencies" and in Item 7 of Part II, titled “Management's Discussion and Analysis of Financial Conditions and Results of Operations," of our Annual Report on Form 10-K for the year ended March 31, 2016, dated May 31, 2016.

ITEM 1A.
RISK FACTORS

For a complete discussion of the Company's risk factors, you should carefully review the risk factors included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016.
In addition, the following additional risk factor relates to the recent referendum in the United Kingdom.
On June 23, 2016, the United Kingdom (the “U.K.”) held a referendum in which voters approved an exit from the European Union (the “E.U.”), commonly referred to as “Brexit”. As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s withdrawal from the E.U. It is unclear what financial, trade and legal implications the withdrawal of the U.K. from the E.U. may have and how such withdrawal may affect the Company.

The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business. The announcement of Brexit and the withdrawal of the U.K. from the E.U. may also create global economic uncertainty, which may cause our Customers to closely monitor their costs and reduce their spending budgets. Any of these effects of Brexit, among others, could adversely affect our business, financial condition, operating results and cash flows.




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ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the first quarter of fiscal 2017, we obtained 104,626 of our ordinary shares in connection with stock based compensation award programs. We did not repurchase any of our shares during the first quarter of fiscal 2017. Twenty-four of our shares were purchased during the quarter at an average price of $69.16 per share by the STERIS Corporation 401(k) Plan on behalf of certain executive officers of the Company who may be deemed to be affiliated purchasers.


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ITEM 6.
EXHIBITS

Exhibits required by Item 601 of Regulation S-K
 
Exhibit
Number
Exhibit Description
 
 
15.1
Letter Re: Unaudited Interim Financial Information.
 
 
31.1
Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
Certification of the Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant Section 906 of the Sarbanes-Oxley Act of 2002.