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STERIS plc (STE)·Q3 2025 Earnings Summary

Executive Summary

  • Q3 FY2025 delivered 6% revenue growth to $1.371B, with adjusted EPS up 11% YoY to $2.32; gross margin was 44.6% and EBIT margin 23.3% as price and productivity offset labor inflation .
  • Management lowered FY2025 as-reported revenue growth to ~6% (from 6.5–7.5%) and narrowed adjusted EPS to $9.05–$9.15 (from $9.05–$9.25), citing roughly $0.10 FX headwind and softer Healthcare capital equipment shipments; tax rate ~23%, capex ~$360M, FCF ~$700M .
  • Segment mix remained favorable: Healthcare +7% (recurring strength), AST +10% (services growth, bioprocessing improvement), Life Sciences -7% as-reported (CECS divestiture, capital softness) but margin up on mix; Healthcare backlog rose to $435M, supporting near-term visibility .
  • Corporate headwinds included legal and benefit costs (>$10M YoY) tied to ethylene oxide litigation; the first case ended in mistrial with retrial scheduled for May; management expects continued defense costs near term .
  • Estimates comparison: S&P Global consensus data was unavailable at time of retrieval due to access limits; directional narrative suggests earnings quality from recurring and price offsets, but FX and capital equipment timing tempered the outlook [GetEstimates error].

What Went Well and What Went Wrong

What Went Well

  • Recurring revenue momentum: Company recurring sales reached $1.080B (+10% YoY), with Healthcare consumables +9% and services +13% driving segment margin improvement; AST services +10% and Life Sciences consumables +14% contributed to mix and profitability .
  • Pricing and productivity: CFO cited 240 bps of price contribution and positive productivity as key levers supporting margin resilience despite labor inflation; adjusted EPS grew 11% YoY to $2.32 .
  • Backlog and orders: Healthcare orders grew >10% with backlog at ~$435M; cancellation rate “0,” supporting shipment conversion once customer project delays clear .

What Went Wrong

  • Healthcare capital equipment timing: Shipments were delayed due to customer readiness, producing a 5% decline in the quarter and contributing to reduced full-year revenue growth and narrowed EPS guidance .
  • AST margin pressure: Labor and energy costs pressured AST margins; a legacy loss on a capital equipment order (Med-X) was a ~200 bps headwind in Q2, with recovery expected but trajectory into Q4 more gradual than hoped .
  • Legal and benefits costs: Litigation and healthcare benefits utilization added over $10M YoY to OpEx in Q3; management anticipates additional ~$5M in Q4 headwinds incorporated into the forecast .

Financial Results

MetricQ1 FY2025Q2 FY2025Q3 FY2025
Revenue ($USD Millions)$1,279.5 $1,328.9 $1,370.6
Diluted EPS - Continuing Ops ($)$1.41 $1.51 $1.75
Adjusted EPS ($)$2.03 $2.14 $2.32
Gross Margin %45.1% 43.7% 44.6%
EBIT Margin %22.3% 22.2% 23.3%
Q3 YoY ComparisonQ3 FY2024Q3 FY2025
Revenue ($USD Millions)$1,297.7 $1,370.6
Diluted EPS - Continuing Ops ($)$1.49 $1.75
Adjusted EPS ($)$2.09 $2.32

Segment revenue and operating income trend:

SegmentQ1 FY2025 Revenue ($MM)Q2 FY2025 Revenue ($MM)Q3 FY2025 Revenue ($MM)Q1 FY2025 Op Inc ($MM)Q2 FY2025 Op Inc ($MM)Q3 FY2025 Op Inc ($MM)
Healthcare$901.2 $944.2 $976.0 $216.9 $228.0 $246.9
AST$249.8 $256.7 $258.1
$117.7 $109.9 $115.8
Life Sciences$128.5 $127.9 $136.4
$52.6 $53.7 $58.1

KPIs and operating drivers:

KPIQ1 FY2025Q2 FY2025Q3 FY2025
Total Recurring Revenue ($USD Millions)$1,037.3 $1,047.4 $1,079.7
Capital Equipment Revenue ($USD Millions)$242.2 $281.5 $290.9
Healthcare Backlog ($USD Millions)$362.0 $405.3 $434.9
AST Services Revenue ($USD Millions)$248.7 $247.9 $253.1
Life Sciences Consumables Revenue ($USD Millions)$69.8 $72.1 $68.7
Free Cash Flow (YTD $USD Millions)$195.7 $344.5 $588.1

Notes:

  • Non-GAAP adjustments primarily reflect amortization of intangibles, integration/divestiture costs, restructuring, and inventory/property step-up; net EPS impact in Q3 was $0.57 .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
As-reported Revenue Growth (%)FY20256.5%–7.5% ~6% Lowered (FX; Healthcare capital equipment)
Constant Currency Organic Revenue Growth (%)FY20256%–7% ~6% Narrowed to mid-point
Adjusted EPS ($)FY2025$9.05–$9.25 $9.05–$9.15 Narrowed (approx. $0.10 FX headwind)
Effective Tax Rate (%)FY2025~23% ~23% Maintained
Capital Expenditures ($USD Millions)FY2025~$360 ~$360 Maintained
Free Cash Flow ($USD Millions)FY2025~$700 ~$700 Maintained
Tariff AssumptionFY2025Not specifiedNo impact assumed; outlook excludes potential new tariffs Clarified; ongoing monitoring

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2)Current Period (Q3)Trend
Healthcare capital equipment timingQ1: Low single-digit full-year guide despite tough comps; turn business capability improving as lead times normalize . Q2: Expect flat to slightly down for FY25 due to timing; weather disruptions and strong orders/backlog .Delays from customer project readiness; orders >10% growth; backlog ~$435M; cancellations “0” .Mixed near term; shipments delayed but orders/backlog supportive .
AST demand (medtech/bioprocessing)Q1: Europe medtech grew; bioprocessing flat YoY; expecting H2 return . Q2: Services +6%, capital strong; medtech stable; first signs of bioprocessing increase; legacy loss hurt margins .Services +10%; bioprocessing above expectations; cautious on “bullwhip” effects; margins stable YoY, up sequentially but pressured by labor/energy .Improving but cautiously optimistic; margins rebuilding .
Margin driversQ1: Gross margin 45.1%; EBIT margin 22.3%; compensation and insurance weighed . Q2: Gross margin 43.7%; EBIT 22.2%; labor/energy costs in AST .Gross margin 44.6%; EBIT 23.3%; >$10M YoY OpEx from litigation and benefits; adjusted tax 24.5% .Modestly improving; cost headwinds persist .
EO litigationQ2: Limited detail; disclosures in filings, no strategy comments .First case ended in mistrial; retrial set for May; management will vigorously defend; increased legal expense in Q3 and expected in Q4 .Ongoing legal overhang; cost headwind into Q4 .
Tariffs/macroQ2: Monitoring reshoring/front-shoring trends in AST APAC (Malaysia) .No tariffs assumed in FY25 outlook; Canada/Mexico sites ~<10% of COGS; analysis ongoing .Watchful; potential FY26 risk .
Endoscopy & ASCQ1: Endoscopy growth at market; reprocessing capital placement strong; supply chain initiatives underway . Q2: Not highlighted.Reprocessing strong with chemistry pull-through; ASC-focused portfolio and channel; confident positioning .Positive structural growth .

Management Commentary

  • “We are updating our outlook primarily to reflect a significant shift in foreign currency based on forward rates through March 31, 2025.” — Dan Carestio, CEO .
  • “Gross margin for the quarter increased 90 basis points… Positive price and productivity offset labor inflation… adjusted EPS… $2.32, an 11% increase.” — Mike Tokich, CFO .
  • “Healthcare capital equipment revenue declined… due primarily to the timing of shipments. Orders grew over 10%… backlog $435 million.” — Dan Carestio, CEO .
  • “We saw growth in bioprocessing demand above our expectations… cautiously optimistic… not ready to declare victory on one quarter of 10% growth.” — Dan Carestio, CEO (AST) .
  • “We incurred about just under $6 million in year-over-year increase [legal] in Q3; YTD just over $10 million; anticipate ~$5 million in Q4.” — Mike Tokich, CFO .

Q&A Highlights

  • Healthcare capital equipment: Delays tied to customer readiness rather than demand hesitancy; timing not yet a trend; strong orders mitigate shipment slippage .
  • AST trajectory: Services accelerated; bioprocessing improving; management “cautiously optimistic” but warns of potential bullwhip effects; aiming for normalized growth .
  • Tariff risk framing: FY25 outlook assumes no new tariffs; Canada/Mexico facilities together <10% of COGS; scenario planning ongoing .
  • Legal expenses: Corporate-level legal costs tied to EO cases increased; additional ~$5M headwind expected in Q4; not adjusted out of non-GAAP .
  • Orders/backlog: Healthcare orders +14% YoY; backlog higher than modeled; cancellation rate “0,” supporting shipment conversion .

Estimates Context

  • S&P Global (Capital IQ) consensus EPS and revenue estimates for Q3 FY2025 were unavailable at time of retrieval due to access limits; therefore, comparisons vs Street are not included [GetEstimates error].
  • Given strong recurring revenue and pricing, results likely prompt modest upward adjustments to recurring-heavy segments; however, FX and capital equipment timing may temper top-line and EPS ranges in models .

Key Takeaways for Investors

  • Earnings quality: Recurring revenue and price execution underpin margins; mixed capital equipment timing is transitory with backlog support .
  • Outlook recalibration: Guidance lowered/narrowed due to FX; watch USD movements and Healthcare capital conversion cadence into Q4 .
  • AST path: Services strength and bioprocessing recovery are constructive; monitor labor/energy costs and margin rebuild; legacy loss impact is behind .
  • Legal overhang: EO litigation remains a headline risk; plan for continued expense in Q4; retrial in May is a potential catalyst .
  • Cash generation: FCF of $588M YTD supports capex, dividends ($0.57/share), and buybacks; leverage ~1.5x, providing optionality for tuck-ins .
  • Near-term trading: Stock may react to FX-driven guide-down and litigation headlines; positive narrative hinges on recurring momentum and backlog conversion .
  • Medium-term thesis: Structural tailwinds in infection prevention, endoscopy reprocessing, ASC migration, and AST network capacity expansion support multi-year growth and margin resilience .