Q3 2025 Earnings Summary
- 14% year-over-year order growth in the Healthcare segment with a backlog $80-$85 million higher than anticipated, indicating strong future revenue streams.
- Applied Sterilization Technologies (AST) services grew 10% in the quarter, showing an upward trend and management expressed cautious optimism about continued growth in this segment.
- Healthcare Services experienced strong growth in the teens, driven by high contract rates on equipment placed over the last few years, leading to increasing recurring revenue from service contracts and repairs. Management doesn't see this trend reversing.
- Shipment delays in Healthcare capital equipment due to customer project delays are causing timing issues and may impact revenue recognition. The company noted that customers are not ready to receive equipment as initially scheduled, leading to shipment push-outs.
- Management is cautious about the sustainability of Applied Sterilization Technologies (AST) recent growth due to potential manufacturing "bullwhip" effects. Despite a 10% growth in the quarter, the company is "not ready to declare victory" and remains cautious about consistent growth in this segment.
- Potential reintroduction of tariffs on imports from Canada and Mexico could impact up to 10% of the company's cost of goods sold, posing a risk to future profitability. The situation is "fluid," and the company is evaluating options to mitigate the potential impact.
| Metric | YoY Change | Reason |
|---|---|---|
Healthcare Revenue | +6.5% | This reflects continued strength in consumables and service revenues, as seen in prior quarters (Q2 2025) where higher procedure volumes and pricing improvements drove growth. These trends remained robust into Q3 2025. |
AST Revenue | +9.9% | Mirroring Q2 2025, pricing improvements and increased service volumes continued to lift AST revenues. In Q3 2025, there was also an uptick in capital equipment demand, contributing to the segment’s growth. |
Life Sciences Revenue | -6.9% | This decline continues the capital equipment softness seen in Q2 2025 (−35.1%) and the impact of the CECS divestiture on service revenues. Despite strong consumables growth earlier in the year, the net effect remained negative in Q3. |
Ireland Revenue | +22.6% | Consistent with Q2 2025 trends, increases in consumables and service revenues drove Ireland’s strong growth, offsetting weaker capital equipment shipments in certain product lines. This momentum carried into Q3 2025. |
Operating Income | +13.5% | Building on Q2 2025 improvements in volume and pricing, Operating Income rose further in Q3 2025. Healthcare and AST segments especially supported margins, while inflationary headwinds were partly offset by productivity gains. |
Net Income | +21.8% | Reflecting higher operating income and lower interest expense, Net Income rose significantly from the prior-year period. Improved segment profitability—particularly in Healthcare—also contributed to this increase. |
EPS (Basic) | +20.4% | Driven by stronger net income and operational efficiencies, EPS benefited from robust performance in recurring revenue streams, streamlined costs, and continued pricing advantages noted in Q2 that extended into Q3. |
Interest Expense | -51% | Following the same trends as Q2 2025, reduced principal and more favorable rates on floating-rate debt significantly lowered interest expense in Q3 2025, directly bolstering net income and EPS. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
As-reported revenue growth from continuing operations | FY 2025 | no prior guidance | 6% | no prior guidance |
Constant currency organic revenue growth | FY 2025 | 6% to 7% | 6% | lowered |
Adjusted EPS | FY 2025 | $9.05 to $9.25 | $9.05 to $9.15 | lowered |
Free Cash Flow | FY 2025 | $700 million | $700 million | no change |
Capital Expenditures | FY 2025 | $360 million | $360 million | no change |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Constant Currency Organic Revenue Growth | Q3 2025 | 6% to 7% | Approximately -1.8% (1,370.6Vs 1,395.645) on a reported basis | Missed |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Healthcare Segment | Consistently emphasized strong consumables and services, noted some capital equipment timing issues, and built a robust backlog; growth expected in mid/high-single digits. | Maintained 7% constant currency organic growth; shipment delays due to customer readiness, yet 14% order growth and a $435 million backlog with improved margins. | Continued optimism despite timing delays |
AST | Sentiment shifted from optimism to caution due to underperformance in volumes and higher costs, though stabilized at 9% organic growth in Q2. | Posted 10% organic growth but remains cautiously optimistic, citing potential “bullwhip effect” in manufacturing. | Improving performance but cautious outlook continues |
Margin Pressures (Labor, Energy) | Persistent labor inflation and energy costs pressured margins, partially offset by pricing and productivity. | Labor and energy remain headwinds (e.g., in AST), though overall gross margin expanded 90 bps driven by pricing and productivity. | Ongoing challenge, with partial offset from pricing |
Tariff Changes | Minimal concern previously, no significant mention until Q2 2025. | Potential reintroduction of tariffs on imports from Canada and Mexico, impacting 10% of COGS. | New risk under active assessment |
Life Sciences | Capital equipment softness after Q2, offset by consumables and services; divestiture of CECS affected reported revenue. | Declined -1% constant currency overall; capital equipment down 30%, partly offset by services/consumables. CECS divestiture continues to reduce reported results. | Sustained slowdown in capital equipment, mixed performance |
Shipment Delays | Healthcare capital equipment delays due to weather (Q2) and prior supply chain issues. | Delays linked to customer project readiness rather than manufacturing constraints. | Continuing delays but attributed to different causes |
Reshoring and Front-shoring | Mentioned in Q2 2025 with notable growth in Malaysia as companies reposition supply chains. | No mention in Q3 2025. | Dropped off from discussion |
-
Tariff Reintroduction Risks
Q: Impact if tariffs are reintroduced in FY26?
A: The company is taking a wait-and-see approach due to the fluid situation but notes that facilities in Canada and Mexico account for just under 10% of cost of goods sold. -
Margin Sustainability
Q: Are strong margins in Healthcare and LifeSci sustainable?
A: Management is pleased with margin improvements driven by favorable volume, mix, and price; they expect margins to remain on track this year but caution that Life Sciences capital equipment is down over 30% year-over-year, which will affect future comparisons. -
Legal Expenses and EO Litigation
Q: What's the outlook for legal expenses and EO retrial?
A: Legal expenses increased by $6 million this quarter and over $10 million year-to-date, with an anticipated additional $5 million in Q4. The EO retrial is set for May, with no new cases added. -
Healthcare Capital Equipment Delays
Q: Are shipment delays in Healthcare capital equipment a trend?
A: Customers are delaying shipments, but it's too early to call it a trend. The company is focused on delivering orders and will provide updates in the next earnings call. -
AST Growth Trend
Q: Is AST's recent growth sustainable?
A: Management is cautiously optimistic with recent 10% growth but notes potential variability due to manufacturing effects; they're not ready to declare sustained growth yet. -
Healthcare Order Growth
Q: Can you comment on strong order growth?
A: Healthcare orders grew 14% year-over-year, with backlog $80–85 million higher than anticipated, indicating strong demand with zero cancellation rates. -
Life Sciences Growth Prospects
Q: Will Life Sciences return to organic growth?
A: Despite a capital slowdown, consumables are showing significant growth. Management is optimistic about future trends and the company's position in pharmaceutical manufacturing. -
Healthcare Services Growth
Q: Is Healthcare Services growth sustainable?
A: Growth is driven by equipment service contracts and a strong repair business. While trends are positive, pricing power may soften as inflation declines. -
Impact of Policy Changes on Spending
Q: Any spending concerns due to new administration?
A: Customers are not showing concerns; orders are strong in both Healthcare and Life Sciences. Products are procedure-driven rather than reimbursement-dependent, mitigating policy impact. -
Endoscopy Business Update
Q: How is the endoscopy business performing?
A: The reprocessing side is doing well with high capital placements and chemistry pull-through. Endoscopy products are growing at market rate but have room for improvement. -
Ambulatory Surgery Centers (ASCs)
Q: Are ASCs still a growth driver?
A: Yes, the company continues to invest in products and resources targeting ASCs, seeing ongoing migration from acute care to smaller facilities. -
Overall Business Growth Outlook
Q: Is mid-single-digit growth the new normal?
A: Management is pleased with current performance but will discuss FY26 guidance in May. Orders are strong, but shipments are taking longer to fulfill.
Research analysts covering STERIS.