STE Q4 2025: 12% order growth offsets tariffs, drives double-digit EPS
- Healthcare Capital Equipment Strength: Management highlighted a 12% growth in orders which has built a comfortable backlog, suggesting durable demand for essential capital equipment that supports continued expansion in Healthcare.
- Effective Tariff Mitigation: Despite a net tariff impact of $30 million, executives expressed confidence in their proactive supply chain and strategic vendor management, mitigating negative effects and preserving margins.
- Robust Financial Management: The company’s proactive capital actions—including a $200 million share buyback in FY '25 and the financial capacity to pursue M&A if opportunities arise—underline a strong balance sheet and commitment to share value enhancement.
- Tariff exposure risk: The company faces a net tariff cost of $30 million that is expected to impact earnings throughout fiscal 2026, with uncertainty around the timing and effectiveness of mitigation efforts despite some offsetting strategies.
- Cash flow pressures: Anticipated cash flow challenges include a $40 million legal settlement for ETO in FY '26 and less dramatic working capital improvements compared to fiscal '25, which could pressure free cash flow.
- Capital equipment and Life Sciences uncertainty: With capital equipment revenue in Life Sciences down 5% last year and ongoing uncertainties in the rebound of this segment, there is concern that slower recovery or lower than expected order growth could weigh on overall performance.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +32.6% (from $1,116.2M to $1,480.5M) | Total Revenue increased significantly due to strong geographic performance—with the U.S. up 34.3%, Ireland surging by 69%, and Other Foreign Locations increasing by 25%—and a balanced mix of robust Product and Service segments, which more than offset the decline in Life Sciences. |
Healthcare | Modest increase (from $1,007.8M to $1,057.3M) | Healthcare revenue grew modestly as improvements in procedure volumes, pricing, and mix sustained performance, building on momentum seen in previous quarters. |
AST | +9.3% (from $250.9M to $274.0M) | AST revenue increased thanks to enhanced service revenue and better pricing strategies, reflecting consistent execution and volume gains compared to the previous period. |
Life Sciences | –6.9% (from $160.6M to $149.5M) | Life Sciences revenue declined due to factors such as divestitures and a drop in capital equipment revenue that continued trends from earlier periods, negatively impacting overall performance. |
United States Revenue | +34.3% (from $802.54M to $1,078.6M) | U.S. revenue surged driven by substantial increases in service, consumable, and capital equipment revenues, reflecting a strong domestic market recovery and improved order/shipment dynamics compared to last year. |
Ireland Revenue | +69% (from $22.55M to $38.2M) | Ireland’s revenue growth was remarkable, reflecting strong regional performance across all product lines and contributing a disproportionately high uplift relative to previous periods. |
Other Foreign Locations | +25% (from $291.16M to $363.7M) | Other Foreign Locations experienced broad-based gains driven by growth in key regions such as EMEA, Asia Pacific, and Latin America, despite mixed performance in specific markets like Canada. |
Product Segment | – (Balanced revenue mix: $801.1M in Q4 2025) | The Product segment benefited from higher volumes and improved pricing, with gross profit enhancements (improved mix, pricing, productivity, and positive acquisition impacts) partially offset by increased labor and material costs; this balanced performance reinforced overall revenue growth. |
Service Segment | – (Contribution of $679.5M in Q4 2025) | Service revenue growth was driven by strong healthcare service contracts and higher recurring revenue streams, which helped stabilize overall financial performance even as Life Sciences service revenue declined, reflecting a continuation and expansion of previous trends. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue Growth (As reported) | FY 2026 | 6% | 6% to 7% | raised |
Revenue Growth (Constant currency) | FY 2026 | 6% | 6% to 7% | raised |
Adjusted EPS | FY 2026 | $9.05 to $9.15 | $9.90 to $10.15 | raised |
Free Cash Flow | FY 2026 | $700 million | expected to be lower than FY 2025 | lowered |
Segment-specific Revenue Growth | FY 2026 | no prior guidance | 6% to 7% for Healthcare, AST, and Life Sciences | no prior guidance |
Pricing Impact | FY 2026 | no prior guidance | Approximately 200 basis points | no prior guidance |
Tariff Impact | FY 2026 | no prior guidance | $30 million | no prior guidance |
EBIT Margins | FY 2026 | no prior guidance | increase by 20 basis points | no prior guidance |
Effective Tax Rate | FY 2026 | no prior guidance | approximately 23.5% | no prior guidance |
Restructuring Cost Savings | FY 2026 | no prior guidance | $20 million | no prior guidance |
Legal and Litigation Costs | FY 2026 | no prior guidance | decrease to $5 million (from over $20 million in FY 2025) | no prior guidance |
Interest Expense | FY 2026 | no prior guidance | Lower interest expense is expected | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue Growth | Q4 2025 | Approximately 6% as-reported growth | Achieved ~32.6% yoy increase ($1,116.2MTo $1,480.5M) | Beat |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Healthcare Capital Equipment Growth & Backlog | Q1–Q3 discussions consistently noted revenue declines (2–5%) offset by strong order growth and robust backlog numbers, with customer shipment timing as a key factor | Q4 highlighted a 5% annual revenue decline, over 12% order growth, and a growing backlog with optimism for fiscal 2026 | Recurring topic with stable underlying demand; sentiment remains positive with a focus on future order fulfillment and fiscal 2026 recovery. |
Healthcare Consumables & Services Expansion with Recurring Revenue | Across Q1–Q3, executives emphasized double-digit or 7% constant currency organic revenue growth, driven by procedure volumes, pricing, and market share gains | Q4 reaffirmed strong recurring streams with 6% organic growth, underpinned by U.S. procedure volumes and market share improvements | Consistent bullish sentiment; the narrative remains steady with recurring revenue drivers intact. |
Life Sciences Segment Dynamics | Q1–Q3 emphasized weak capital equipment demand due to funding cuts and cyclicality, offset by strong consumables, injectables opportunities, and margin improvements | Q4 described continued capital equipment challenges with a late‐year order rebound and robust consumables/chemistries performance supporting fiscal 2026 outlook | Persistent challenges in equipment but offset by consumables, with renewed optimism for recovery; sentiment remains cautiously upbeat. |
Applied Sterilization Technologies (AST) Growth & Sustainability Concerns | Q1 reported moderate (8%) growth with capacity expansion plans; Q2 expressed caution amid slower-than-expected bioprocessing recovery (9% growth); Q3 noted strong 10% growth with cautious optimism | Q4 delivered 9% organic revenue growth yet maintained caution due to variability in bioprocessing demand and headwinds from energy and labor costs | Performance shows volatility with steady services growth but growing caution regarding sustained momentum. |
Tariff Exposure, Mitigation Strategies & Trade Risk | Absent in Q1; Q2 introduced discussion through reshoring comments (e.g. growth in Malaysia) and Q3 indicated a wait-and-see approach for regions like Canada and Mexico | Q4 provided detailed estimates—a net impact of approximately $30 million—and outlined active mitigation strategies leveraging supply chain adjustments | Emergent and increasingly scrutinized; what was not mentioned in Q1 now features prominently with clearer cost impact and mitigation focus. |
Supply Chain Management & Shipment Delays | Q1 detailed supply chain initiatives, including moving to larger suppliers and managing backlog; Q2 noted weather-related shipment delays; Q3 addressed customer-induced delays | Q4 did not provide specific commentary on supply chain or shipment delays | Previously significant discussions have dropped off in Q4, suggesting either resolution or lower priority of the issue. |
Financial Management & Capital Allocation Strategies | Q1 highlighted M&A activity, dividend hikes, restructuring, and debt reduction; Q2 detailed buybacks, a robust M&A pipeline, and capital expenditure discipline; Q3 continued focus on debt paydown and free cash flow targets | Q4 reported record free cash flow of $787 million, continued debt paydown, and detailed factors like a legal settlement and tariff headwinds affecting future allocations | Consistent financial discipline across periods, with Q4 introducing additional headwinds that temper the positive free cash flow and capital allocation narrative. |
Cost Pressures from Labor, Energy, and Margin Erosion | Q1 noted increased labor costs affecting margins modestly; Q2 discussed labor inflation and energy cost pressures causing margin erosion; Q3 mentioned these issues with offsetting productivity improvements | Q4 reported productive pricing, mix improvements, and volume gains offsetting labor pressures, though energy headwinds (notably in AST) remain a concern | Ongoing cost pressures persist; however, improvements in pricing and mix have helped blunt the impact, maintaining balanced sentiment. |
Reshoring and Front-Shoring Trends in Asia-Pacific | Not mentioned in Q1; Q2 featured reshoring/front-shoring discussion with significant growth in Malaysia for AST ; Q3 did not revisit the topic | Q4 did not mention reshoring or front-shoring trends | A topic introduced in Q2 but not followed up in Q3/Q4, implying it may have been a temporary focus. |
Operational Efficiency Improvements in Manufacturing and Supply Chain | Q1 discussed supply chain initiatives with larger suppliers and facility closures; Q3 highlighted productivity improvements; Q2 had no specific commentary | Q4 indirectly referenced through working capital and inventory improvements but without detailed discussion on operational changes | Efficiency improvements are a recurring focus, though detailed operational initiatives are less emphasized in Q4, suggesting integration into overall operations. |
Legal Settlement Risks Impacting Future Cash Flow | Not mentioned in Q1; Q2 touched on litigation disclosures without cash flow emphasis; Q3 discussed rising legal expenses around EO trials | Q4 explicitly mentioned a $40 million legal settlement for ETO expected to impact fiscal 2026 cash flow alongside other tariff-related costs | An emerging risk gaining prominence in Q4, shifting from a peripheral litigation concern to a direct cash flow impact. |
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EPS Impact
Q: Tariff effect on EPS impact?
A: Management explained that while tariffs impose roughly $15M in negative impacts, they are largely offset by $20M of restructuring savings and lower interest expense, resulting in strong double-digit EPS growth overall. -
Tariff Breakdown
Q: Break down $30M tariff exposure?
A: Management noted that the net $30M tariff cost is evenly split—with about half from China-related tariffs and half stemming from a 10% global tariff—with mitigation efforts in place. -
Tariff & Buyback
Q: Mitigation and share repurchase details?
A: They clarified that the $30M tariff impact is expected to hit evenly over the year, while increased share repurchases—nearly $200M in FY25—were aimed at offsetting dilution rather than signaling a shift in strategy. -
Cash Flow Guidance
Q: Why is cash flow guidance lower?
A: Management pointed out that an anticipated $40M legal settlement for ETO and a less dramatic inventory reduction will weigh on cash flow in FY26. -
LifeSci Recovery
Q: Will Life Sciences bounce back to 6–7%?
A: They expressed confidence in Life Sciences recovering to the 6–7% growth range, driven by robust recurring revenues and an improved order backlog despite earlier capital equipment declines. -
M&A Outlook
Q: Any near-term M&A plans?
A: Management stated they possess both the financial capacity and intellectual readiness to pursue attractive acquisitions when the right opportunities emerge, though no deals are active now. -
Onshoring
Q: Is U.S. onshoring underway?
A: They suggested that onshoring is more of a topical discussion rather than a clear trend, given the regulatory complexities inherent to a highly regulated industry. -
Industry Consolidation
Q: Will small players need to sell?
A: Management believes some consolidation may occur, but they would prioritize building greenfield opportunities over acquiring legacy assets. -
AST Outlook
Q: What growth for AST services?
A: They expect AST services to achieve high single-digit growth, with bioprocess recovery being cautious while capacity remains ample for potential expansion. -
Client Behavior
Q: Any shifts in client purchasing?
A: While discussions continue, management has not observed any significant change in client behavior across segments amid current macro conditions. -
Market Share
Q: Which Healthcare line leads gains?
A: Management credited overall Healthcare performance to an integrated portfolio, particularly in sterile processing services, rather than any single business line. -
Segment Guidance
Q: Are growth rates different within Healthcare?
A: They refrained from providing detail by subsegment, noting only that robust capital orders underline their positive outlook for Healthcare. -
Capital Orders
Q: How are healthcare equipment orders?
A: Management highlighted a 12% year-over-year order growth with a very strong backlog into Q1, reflecting durable demand despite minor deferrals. -
AST Capacity
Q: Can AST services scale if demand rises?
A: The team confirmed that they are well positioned to support even higher growth in AST services without capacity constraints. -
AST Quarterly
Q: Was December performance front-loaded?
A: They explained that December’s strong results were a seasonal anomaly, with no evidence of pre-tariff inventory build-up influencing the numbers.
Research analysts covering STERIS.