STERIS Navigates Tariff Headwinds as Margins Dip

Date of Call: Feb 5, 2026

Financials Results

• Revenue: 9% growth as-reported; 8% constant currency organic growth
• EPS: $2.53 per diluted share, a 9% increase over the prior year
• Gross Margin: 43.9%, declined 70 basis points compared with the prior year
• Operating Margin: 22.9% EBIT margin, decreased 40 basis points compared with last year

Guidance:

• Revenue for fiscal 2026: 8% to 9% as-reported growth; 7% to 8% constant currency organic growth.
• Earnings per share for fiscal 2026: $10.15 to $10.30, with the higher end less likely due to $10M more in anticipated tariffs.
• Free cash flow for fiscal 2026: $850 million.
• Capital expenditures for fiscal 2026: $375 million.

Business Commentary:

Revenue Growth and Tariffs:

• STERIS plc reported total as-reported revenue growth of 9% for Q3 2026, with constant currency organic revenue growth of 8%.
• This growth was driven by a 200 basis points increase in price and volume. However, the gross margin declined by 70 basis points to 43.9% due to increased tariffs and inflation.

Healthcare Segment Performance:

• The Healthcare segment's constant currency organic revenue grew 8%, with service revenue increasing by 11% and consumables by 8%.
• EBIT margins for this segment decreased by 100 basis points to 24.3% due to increased tariffs and inflation, despite benefits from volume and pricing.

AST and Life Sciences Segments:

• The AST segment reported constant currency organic revenue growth of 8%, with a 9% increase in services and 103% growth in capital equipment revenue.
• The Life Sciences segment's constant currency organic revenue increased by 5%, driven by 11% growth in consumables. Margins declined by 20 basis points due to tariffs and inflation.

Tariff Impact and Mitigation:

• STERIS experienced a $16 million pretax tariff impact in Q3, primarily affecting the Healthcare segment, with an additional $10 million anticipated for the fiscal year.
• Mitigation efforts include shifting product movement, supplier negotiations, and seeking cost reductions and productivity improvements.

Outlook and Guidance:

• The company maintains its outlook for fiscal 2026 with 8% to 9% as-reported revenue growth and constant currency organic revenue growth of 7% to 8%.
• Earnings outlook is set between $10.15 to $10.30, with free cash flow expected at $850 million and capital expenditures unchanged at $375 million.

Sentiment Analysis:

Overall Tone: Neutral

• Management expressed satisfaction with year-to-date performance ('delivering constant currency organic revenue growth of high single digits and double digits earnings per share despite the tariff headwinds') but noted caution for Q4 due to a 'bit of a slowdown in the second half' and tough prior-year comparisons. Guidance was maintained but adjusted for higher tariffs.

Q&A:

• Question from Brett Fishbin (KeyBanc Capital Markets Inc.): Could you touch on fourth quarter constant currency growth given you're tracking a bit above the high end of the annual range, and if there are any concerns or temporary items impacting Q4?
  Response: Management expects a slowdown in the second half and a tough comparison to a strong prior-year Q4, particularly in AST capital equipment, so they are holding the annual constant currency guidance of 7% to 8%.

• Question from Brett Fishbin (KeyBanc Capital Markets Inc.): What are you seeing around capital equipment backlog activity in both segments?
  Response: Life Sciences backlog growth reflects a recovery from a year ago as pharma spending increases. Healthcare backlog remains stable over $400M with no meaningful slowdown in orders, as products are essential for hospital capacity.

• Question from Steven Etoch (Stephens Inc.): How would you characterize current conditions in Life Sciences and customer conversations around U.S. onshoring and capacity expansions?
  Response: Conditions are positive due to manufacturing location shifts (e.g., new aseptic capacity in North Carolina/Pennsylvania) and improved pharma spending compared to 1.5 years ago.

• Question from Steven Etoch (Stephens Inc.): What is the update on tariff mitigation efforts and ability to offset costs in FY '27?
  Response: Management is optimistic about absorbing tariffs through mitigation efforts like shifting product movement, supplier negotiations, and cost/productivity improvements.

• Question from Michael Polark (Wolfe Research): Can you clarify the $55M tariff impact? Is that for six months (Dec/March) or did it impact the September quarter, to understand annualization?
  Response: $55M is an annual run rate for FY26, with $16M incurred in Q3 and an expectation for it to step up slightly in Q4.

• Question from Patrick Wood (Morgan Stanley): Could CMS proposals (PPE onshoring, API relocation) and shifting surgeries to ASCs affect you positively or negatively?
  Response: ASC shift is a positive for STERIS due to new capacity demand and higher sterilization needs. PPE and API proposals have not yet resulted in material manufacturing commitments impacting the business.

• Question from Patrick Wood (Morgan Stanley): Is a more integrated and aggressive commercial push in EMEA still on the cards?
  Response: Yes, it's a committed priority with structural go-to-market changes underway, though execution will take time.

• Question from Michael Matson (Needham & Company): What is the incremental tariff exposure for FY '27?
  Response: It's reasonable to assume incremental tariff impact in FY27 would be less than a quarter's worth based on current rates and risk.

• Question from Michael Matson (Needham & Company): Why haven't you done more acquisitions given the low leverage ratio, and what's the outlook?
  Response: The company is active on smaller bolt-ons but finds major transformative M&A difficult due to stringent financial and strategic criteria, with a disciplined approach.

• Question from Jason Bednar (Piper Sandler): Why was cash flow guidance unchanged given strong first 9 months performance, and are there fluctuations expected at year-end?
  Response: Guidance reflects conservatism due to timing of heavy capital activity and potential winter weather impacts on collections.

• Question from Jason Bednar (Piper Sandler): Can you maintain typical 7-8% growth beyond FY26 given a healthy backlog and ASP momentum?
  Response: Macros currently look negative-free, but specific FY27 guidance will be provided next quarter.

• Question from Michael Polark (Wolfe Research): Why did AST services growth decelerate to 6% constant FX in Q4 from 10% prior quarters, and what is the outlook for the March quarter?
  Response: AST services growth was soft in October, improved in November, and strong in December, with no clear geographic or customer subsegment cause. Tariff-related customer inventory adjustments may have contributed to the October softness but were not a material negative impact.

Contradiction Point 1

Healthcare Services Growth Outlook

It involves a revision in the expected growth rate for Healthcare services, impacting financial forecasts and investor expectations.

Can you discuss fourth quarter constant currency growth? - Brett Fishbin (KeyBanc Capital Markets Inc.)

2026Q3: Healthcare services, which grew 11% in Q3, is expected to continue slowing in Q4. - [Julie Winter](CFO) and [Karen Burton](CFO)

What's driving the strong growth in Healthcare service revenue, and what's the current contribution from X-ray modalities? - Patrick Wood (Morgan Stanley)

2026Q2: Growth in this area is expected to slow from 12-13% to a lower rate as labor cost increases normalize. - [Daniel Carestio](CEO)

Contradiction Point 2

AST Service/Backlog Outlook

It reflects an inconsistent characterization of the AST service order trend and backlog situation, affecting market strategy and growth expectations.

Can you provide insight into the capital equipment backlog activity in both Healthcare and Life Sciences segments? - Brett Fishbin (KeyBanc Capital Markets Inc.)

2026Q3: There has been no meaningful slowdown in capital spending. Products are often seen as essential utilities... making the business resilient. - [Daniel Carestio](CEO)

What factors contributed to back-to-back quarters of double-digit growth in AST's services, and how sustainable are these trends? - Brett Fishbin (KeyBanc Capital Markets Inc.)

2026Q2: AST service growth (9-10% outlook) is driven by stable medical device volumes, recovery in bioprocessing demand... - [Daniel Carestio](CEO)

Contradiction Point 3

Tariff Impact Timing and Annualization

It involves differing explanations of tariff cost timing, impacting financial forecasts and cost management expectations.

Does the $55 million tariff impact apply only to the December and March quarters, or was there also an impact in September? - Michael Polark (Wolfe Research, LLC)

2026Q3: Tariffs have been incurred every quarter, with $16 million in Q3 and an expected slight step-up in Q4. - [Karen Burton](CFO)

Free cash flow guidance increased while earnings guidance remains unchanged. Is this primarily due to working capital (inventory or receivables)? - Michael Stephen Matson (Needham & Company, LLC)

2026Q1: The $50 million increase is from working capital improvements... carried through for the year after a strong Q1. - [Michael J. Tokich](CFO)

Contradiction Point 4

Life Sciences Capital Backlog Drivers and Cycle Status

It pertains to differing views on the cause of backlog strength and the segment's recovery cycle, influencing market strategy and growth expectations.

Can you elaborate on capital equipment backlog trends in Healthcare and Life Sciences segments, noting stable Healthcare backlog and strong growth in Life Sciences? - Brett Fishbin (KeyBanc Capital Markets Inc.)

2026Q3: The strong backlog growth is a recovery from a year ago when pharma spending was low. Orders have been strong for several quarters, indicating a much better macro environment than a year ago. - [Daniel Carestio](CEO)

What factors are driving the Life Sciences segment's sequential backlog growth, and what are expectations for the year ahead? - Steven McLaurin Etoch (Stephens Inc.)

2026Q1: A year ago, the segment went through a 16-month cycle with a capital order slowdown due to customer layoffs, plant relocations, and a vaccine slowdown. That cycle is now complete, with strong order intake recently, and the company expects to catch up. - [Daniel A. Carestio](CEO)

Contradiction Point 5

Characterization of US Onshoring and Capacity Expansion Trends

It involves a shift in describing US onshoring from a strategic talking point to a tangible, imminent trend, affecting market strategy and investor perception.

What are the current conditions in the Life Sciences market and trends in customer discussions about U.S. onshoring and capacity expansions? - Steven Etoch (Stephens Inc.)

2026Q3: The environment is positive. Announcements of new manufacturing capacity in states like North Carolina and Pennsylvania benefit STERIS... Pharma is in a much better spot than 1.5 years ago. - [Daniel Carestio](CEO)

How are customer conversations progressing regarding potential onshoring back to the U.S.? - Patrick Wood (Morgan Stanley)

2025Q4: It is likely more of a strategic bullet point than an immediate action... will take time. - [Daniel Carestio](CEO)