STERIS plc (STE) Earnings

Management highlights

- Overall Full-Year 2026 Financial Performance * Fiscal 2026 was a record year for Steris, with 9% total as-reported revenue growth and 7% constant currency organic revenue growth, reaching ~$6 billion in total revenue. Adjusted net income exceeded $1 billion, and adjusted diluted EPS grew 10% to $10.17. * Total company EBIT margin expanded 10 basis points to 23.3% for full-year 2026, even after incremental tariffs cut margins by 80 basis points. Free cash flow for the full year was $982.9 million, with a strong balance sheet: gross debt to EBITDA of 1.2x, well below the 2-2.5x target range. * Q4 2026 as-reported total revenue grew 7%, constant currency organic revenue grew 5% (driven by volume and 230 basis points of pricing). Q4 gross margin was 44% (down 30 basis points year-over-year), and Q4 EBIT margin was 24.2% (down 60 basis points year-over-year, impacted by inflation and $10 million in incremental tariffs, which came in below expectations). Adjusted diluted Q4 EPS was $2.83, up 3% year-over-year. - Capital Allocation Updates * Steris increased its quarterly dividend by $0.06 to $0.63, marking the 20th consecutive year of dividend growth. * The company invested in internal growth projects, including global X-ray expansion for the AST segment, and completed two tuck-in acquisitions adding to the global healthcare portfolio. It spent $225 million on share buybacks in 2026. * The Board of Directors approved a new $1 billion share buyback authorization; management expects annual buybacks of $200 to $300 million going forward. - Strategic Milestones * Over the past five tumultuous years, Steris delivered average constant currency organic revenue growth of 9% and 11% compounded annual adjusted earnings growth. The healthcare segment has transformed from a product/service provider to a strategic partner helping customers solve core operational challenges. * Two recent small tuck-in acquisitions: vertical integration of MedGlass Walls supplier (extending U.S. reach globally) and acquisition of a GI product family expanding Steris' offering and channel access; the two are expected to generate combined $45 million in 2027 revenue.

Guidance

- Total company 2027 as-reported revenue growth is expected to be 7% to 8%, with constant currency organic revenue growth of 6% to 7%, including ~200 basis points of expected pricing. Foreign exchange is expected to be slightly favorable, and tuck-in acquisitions contribute inorganic revenue to the outlook. - Segment organic constant currency growth guidance: 6% to 7% for both Healthcare and Life Sciences, and 7% to 8% for AST. Management takes a conservative stance on AST to start 2027 due to ongoing careful customer inventory management and difficult year-over-year comparisons in the first half, with growth expected to improve in the second half. - EBIT margin is expected to expand ~50 basis points at the high end of the outlook. Tariff costs are expected to be flat year-over-year, and there is a ~$20 million tailwind from incentive compensation normalization. Select new investments are planned, including a multi-year AI project to upgrade service workflows for Healthcare and Life Sciences. - 2027 adjusted diluted EPS guidance is $11.10 to $11.30, representing 9% to 11% year-over-year growth. The adjusted effective tax rate is expected to be 25%, with upward pressure from incremental withholding taxes required to fund capital allocation priorities. - Capital expenditures are expected to be $375 million, and free cash flow is expected to be $850 million. A key capital project is a new $60 million two-year sterility assurance manufacturing plant in Mentor, Ohio, to consolidate existing U.S. production, expected to be operational by the end of calendar 2027.

Segment performance

1. Healthcare: Generated $4 billion in full-year 2026 revenue, contributing ~66.7% of total company revenue. It grew 9% as-reported and 8% constant currency organic, driven by 12% service growth, 7% consumables growth, and 6% capital equipment growth. Full-year operating income reached $1 billion. Capital equipment backlog ended at just under $400 million, with orders up 2% in Q4 2026. 2. Applied Sterilization Technologies (AST): Grew 10% as-reported and 7% constant currency organic, reaching over $1 billion in full-year revenue (contributing ~16.7% of total company revenue). It crossed the milestone of exceeding $500 million in full-year operating profit. Full-year service grew 11% as-reported (8% constant currency organic), in line with management expectations, though Q4 2026 service was slowed by severe U.S. snowstorms. Business results were softer than anticipated in the second half of 2026 due to customer inventory management. 3. Life Sciences: Grew 9% as-reported and 7% constant currency organic, contributing ~8.3% of total company revenue. It posted a record full-year, exceeding $250 million in operating profit for the first time. Growth was driven by 15% capital equipment growth (as customers resumed capital investment after a 2025 downturn), 8% steady consumables growth, and 5% services growth. Capital equipment backlog ended at just under $100 million.

Risks & headwinds

- Incremental tariffs from non-U.S. sourced materials and products continued to pressure margins in 2026, with a total $46 million incremental impact cutting full-year margins by 80 basis points. While recent tariff changes are favorable and offset 2027 volume increases, future trade policy changes (including ongoing USMCA renegotiation) create uncertainty, as no changes to the current framework have been assumed in guidance. - Upward pressure on the effective tax rate is expected to continue in 2027, as cross-border cash movements to fund capital allocation (dividends, buybacks, M&A) trigger incremental U.S. withholding taxes. - Persistently high oil and energy prices could increase freight, raw material, and operating costs, though management notes energy has low single-digit overall exposure, and most incremental cost pressure has already been incorporated into guidance. - AST segment growth is pressured near-term by ongoing MedTech customer inventory drawdowns and difficult first half year-over-year comparisons. Q4 2026 AST growth was reduced by 150 to 200 basis points due to severe weather, and the timing of recovered demand is uncertain. - Supply chain disruption for critical components remains a potential risk, though management notes Steris has significantly improved supply chain resiliency since prior disruptions.

Analyst Q&A

• Q: What are the key moving pieces behind the 50 basis points expected 2027 margin expansion, including the impact of inflation, energy prices, and tariffs? /

  A: Management expects operational improvements and ongoing sell-through of higher-margin consumables to drive margin expansion, with potential upside if AST performs better than the conservative base case. Recent tariff changes are favorable enough to offset expected volume increases in 2027, so tariffs will not be a material headwind. The 2026 overachievement of performance targets creates a $20 million incentive compensation tailwind for 2027. Energy and raw material inflation (oil-linked costs impact ~20% of COGS, with even lower exposure for AST) have been incorporated into guidance, and most incremental freight costs can be passed through to customers.

• Q: Why is the new $1 billion buyback authorization larger than prior authorizations, and does this signal a shift toward larger M&A transactions? /

  A: There is no shift in M&A strategy; Steris will continue to pursue small tuck-in acquisitions when attractive opportunities arise, and the two recent tuck-ins were only called out because they have a material 100 basis point impact on 2027 healthcare segment growth. Incremental withholding taxes from cross-border cash repatriation for buybacks have historically limited buyback size, but management now views consistent annual buybacks of $200 to $300 million as beneficial for long-term shareholder value, with a measured approach to avoid incremental excess withholding costs.

• Q: What are the motivations for the new sterility assurance manufacturing consolidation project, and what efficiency gains are expected? /

  A: The project is primarily driven by capacity needs for this high-growth, high-margin business, which has gained significant share as healthcare systems increasingly dual-source sterility assurance products. The new facility will be a nearly fully automated center of excellence, replacing three existing U.S. facilities. While long-term operating cost savings are expected, the core goal is to support continued growth of the high-margin segment, not just efficiency gains.

• Q: What is the outlook for life sciences growth, especially given reshoring trends after the post-COVID boom-bust cycle? /

  A: Life Sciences is following its typical industry capital cycle, and buying patterns for capital equipment have already recovered to pre-downturn levels, matching the 2026 growth performance. Consumables are the segment's consistent core, delivering steady 8% high-margin growth. Reshoring of pharmaceutical manufacturing is creating new demand, and Steris is well-positioned to serve new large-scale domestic operations, which aligns with the company's sweet spot of serving large industry customers rather than small early-stage companies.