Steris (NYSE: STE) Q1 2026 Earnings Call dated Aug. 07, 2025
Corporate Participants:
Julie Winter — Vice President, Investor Relations and Corporate Communications
Mike Tokich — Chief Financial Officer
Daniel A. Carestio — President and Chief Executive Officer
Analysts:
Brett Fishbin — Analyst
Mac Etoch — Analyst
Michael Polark — Analyst
Jason Bednar — Analyst
Mike Matson — Analyst
Justin Wang — Analyst
Dave Windley — Analyst
Presentation:
Operator
Good day, and welcome to the STERIS plc First Quarter 2026 Conference Call. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to Julie Winter, Investor Relations. Please go ahead.
Julie Winter — Vice President, Investor Relations and Corporate Communications
Thank you, Alan, and good morning, everyone. Speaking on today’s call will be Mike Tokich, our Senior Vice President and CFO, and Dan Carestio, our President and CEO. I do have a few words of caution before we open for comments from management.
This webcast contains time-sensitive information that is accurate only as of today. Any redistribution, retransmission, or rebroadcast of this call without the expressed written consent of STERIS is strictly prohibited. Some of the statements made during this review are or may be considered forward-looking statements. Many important factors could cause actual results to differ materially from those in the forward-looking statements, including, without limitation, those risk factors described in STERIS’ securities filings. The company does not undertake to update or revise any forward-looking statements as a result of new information or future events, or developments. STERIS’ SEC filings are available through the company and on our website.
In addition, on today’s call, non-GAAP financial measures, including adjusted earnings per diluted share, adjusted operating income, constant currency organic revenue growth, and free cash flow, will be used. Additional information regarding these measures, including definitions, is available in our release as well as reconciliations between GAAP and non-GAAP financial measures. Non-GAAP financial measures are presented during this call with the intent of providing greater transparency to supplemental financial information used by management and the Board of Directors in their financial analysis and operational decision-making.
With those cautions, I will hand the call over to Mike.
Mike Tokich — Chief Financial Officer
Thank you, Julie. Good morning, everyone. It is once again my pleasure to be with you this morning to review the highlights of our first-quarter performance from continuing operations. For the first quarter, total as-reported revenue grew 9%. Constant currency organic revenue grew 8% in the quarter, driven by volume as well as 230 basis points of price. Gross margin for the quarter increased 20 basis points compared with the prior year to 45.3%.
Positive price and productivity outpaced inflation and tariff costs. EBIT margin increased 50 basis points to 22.8% of revenue compared with the first quarter of last year due to the improvement in gross margin and operating expense leverage. The adjusted effective tax rate in the quarter was 23.5%. The year-over-year increase was driven primarily by geographic mix and changes in discrete item adjustments.
Net income from continuing operations in the quarter was $231.2 million. Adjusted earnings per diluted share from continuing operations was $2.34, a 15% improvement compared to the prior year. Capital expenditures for the first quarter of fiscal 2026 totaled $94 million, and depreciation and amortization totaled $119 million.
We continued to pay down debt during the quarter, ending with $1.9 billion in total debt. Gross debt-to-EBITDA at quarter end was 1.2 times.
Free cash flow for the first quarter of fiscal 2026 was $327 million, a very strong start to the fiscal year, driven by an increase in earnings and improvements in working capital.
Last week, we announced our 20th consecutive year of dividend increases with a 10% increase to $0.63 per quarter as we continue to prioritize consistent dividend growth.
Before I close, I’m sure that you have all read last night’s release regarding our CFO transition. I want to take a moment to thank all of you for your continued support over the last 17 years, actually 18 years if you count the time I served as Interim CFO. The time — the company has grown significantly during that time in terms of revenue and profitability. Being able to provide not only financial leadership but also to provide strategic oversight throughout this significant period of growth has been a tremendous honor and accomplishment for me.
STERIS is on solid financial footing and has a proven financial team in place, which makes now the right time to transition the CFO position to Karen. Karen and I have worked together for the past 20 years at STERIS, and we have been working behind the scenes for many years, preparing her for this role. I am confident in not only her financial ability, but also her leadership capability to lead this great company into the future. I will be around for a while as a special financial advisor and look forward to supporting a smooth transition.
With that, I will now turn the call over to Dan for his remarks.
Daniel A. Carestio — President and Chief Executive Officer
Thanks, Mike, and good morning, everyone. Thank you for joining us to hear more about the start to fiscal 2026 and our updated outlook.
Before we jump into the numbers, I do want to take a moment to recognize Mike for his long and successful career as CFO. Mike’s leadership and financial acumen have been essential to our success. Under his leadership as CFO, we have grown meaningfully in all aspects, revenue, earnings, and market cap, and have completed over 80 M&A transactions. He has built a strong global team, including Karen, and we are well-prepared for this transition.
Moving on to our performance. Mike covered the quarter at a high level, so I will add some commentary on our segments. Starting with Healthcare. Constant currency organic revenue grew 8% for the first quarter, with growth across all categories. Healthcare capital equipment revenue increased 6% for the quarter, with underlying order growth of 14% and ending backlog just over $400 million.
Service continued its streak of outperformance, growing 13% in the first quarter, and consumables grew 5% compared with a strong first quarter last year. EBIT margins for Healthcare in the quarter increased 10 basis points to 24.2% with volume, pricing, positive productivity, and restructuring program benefits offsetting tariffs and inflation.
Turning to AST. Constant currency organic revenue grew 10% for the quarter, with 12% growth in services. Services benefited from currency, bioprocessing demand, and stable medical device volumes. EBIT margins for AST were 48.6%, up 150 basis points from the first quarter of last year, as the additional volume and pricing were able to more than offset increases in energy and labor.
Constant currency organic revenue increased 4% for the Life Sciences group in the quarter, driven once again by strong growth in consumables of 8%. Services revenue grew 3%. Capital equipment revenue was about flat, with backlog up over 50% to $111 million. Margins increased 260 basis points, benefiting from favorable mix, pricing, and productivity.
From an earnings perspective, we grew the bottom line 15% in the quarter to $2.34 per diluted share. Included in that number is approximately $9 million of tariff impact, which primarily impacted our Healthcare segment.
Turning to our outlook for fiscal 2026. As noted in the press release, we are updating our outlook for as-reported revenue due to a significant shift in forward currency rates. We now anticipate approximately 8% to 9% revenue growth, which reflects about 200 basis points of favorable currency. Constant currency organic revenue growth is unchanged at 6% to 7%.
Each segment is expected to grow constant currency organic revenue in the range of 6% to 7% for fiscal 2026. AST’s revenue and growth in the first quarter was stronger than anticipated. Despite the strong start, we are maintaining our outlook for the year at this time.
Our earnings outlook is also unchanged at $9.90 to $10.15, which now reflects $45 million in tariff costs, an increase of $15 million over last quarter. Fortunately, favorable foreign currency will offset that increase.
For your modeling purposes, at the high end of our earnings range, we would expect EBIT margins to be about flat. No change is anticipated to our effective tax rate of approximately 23.5%.
Based on the strong start to the year, we are increasing our outlook for free cash flow by $50 million to $820 million for fiscal 2026. Capex remains unchanged at $375 million.
That concludes our prepared remarks for the call. Julie, would you please give the instructions so we can begin the Q&A?
Julie Winter — Vice President, Investor Relations and Corporate Communications
Thank you, Mike and Dan, for your comments. Alan, can you please give the instructions for Q&A and get started?
Questions and Answers:
Operator
We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Brett Fishbin of KeyBanc. Please go ahead.
Brett Fishbin
Hey guys, thank you very much for taking the questions, and good morning. Congrats on the announcement, Mike. I just wanted to ask first on the revised tariff estimate. If you could just give a little bit more detail on specifically what drove the increased expectation, whether it was a change in policy or something you were seeing as you continue to do more of the analysis. Thank you very much.
Mike Tokich
Yeah, Brett, this is Mike. A couple of things drove the increase. First is the additional tariffs that we have seen on metals. Both steel and aluminum went from 25% to 50%. Copper went from zero to 50% and the EU changed from 10% to 15%.
Remember when we guided in mid-May, we had more clarity than most. So these are changes since then, and that’s why we are increasing and not decreasing our tariff exposure.
Brett Fishbin
No. Certainly makes sense there. And then just wanted to ask one more follow-up on AST. Sounded like you’re generally maintaining the 6% to 7% organic expectation despite a double-digit start. So I was curious if that’s more — leans toward just conservatism after just one quarter of the year, or if you’re seeing anything changing that would make you expect certain quarters to maybe be below that range. Thank you very much again.
Daniel A. Carestio
Yeah, Brett, this is Dan. I would say it’s general conservatism. There’s some moving parts going on in Medtech, which reflected some changing positions of manufacturing from our customers, and at this point, we feel very confident in the numbers that we’re putting forward, and if things go out a little better, maybe we do a little better.
Operator
Our next question comes from Mac Etoch of Stephens. Please go ahead.
Mac Etoch
Hey, good morning. Thank you for taking my questions, and congrats, Mike. I think just first, I’d love to get your take on what you’re seeing within the bioprocessing market. Just — I think last year you commented on some slower start to FY26. So I just want to get an update there.
Daniel A. Carestio
Yeah, sure. Hi, this is Dan. I would say that for the last year or so, we’ve sort of seen some fits and starts. In terms of volumes coming through the facilities, it’s been pretty consistent now for, I would say, the last four or five months, and back to what we would see as a normal trajectory off of a reset base.
So we believe at this point, it’s fairly predictable. That’s — the assumption there is that we don’t have customers overbuilding inventory, which is hard to fully understand. But nonetheless, it’s been much more consistent in recent periods.
Mac Etoch
Appreciate that. And then also, I noticed the Life Science segment saw a pretty strong increase in the segment’s backlog sequentially. So I was just kind of curious to get your sense of what’s driving the increase there? What your expectations are for the rest of the year
Mike Tokich
Yeah. A year ago, Life Sciences and Pharma kind of runs on these 16-month cycles when things go down a bit in terms of capital. During that time, we continued to do really well in our consumables business. But as those orders dried up because of customer layoffs and some plant relocations, and sort of extreme slowdown in vaccines and a number of other things, the capital orders dried up.
And what we’ve seen is that cycle is pretty much completed at this point. We’ve seen a very good, strong order intake for quite some time now and feel pretty good about catching up on that space.
Mac Etoch
Appreciate the color.
Operator
The next question comes from Michael Polark of Wolfe. Please go ahead.
Michael Polark
Hey, good morning. Mike Tokich, it’s been a pleasure. First question, I’m interested, Dan, in your perspective on the comments recently from one of your competitors in low-temp sterilization. Six or so weeks ago, kind of an alarm bell sounded on procedure softness, purchasing delays in capital related to kind of regulatory and policy shift concerns at hospitals. Obviously, in these numbers from you, I see none of that. And so what did you make of all that? Is this you’re taking share? Any perspective would be welcome?
Daniel A. Carestio
Hi, Mike, it’s Dan. Yeah, I mean, it’s hard to say. I mean, we have a lot of data points from a number of the off-site centers that we run for hospitals in terms of volume. The volume we’re seeing going through AST, and what we’ve seen over time and in the recent quarter in terms of our backlog growth and order intake. So we feel like — I’m not sure where they came to that conclusion, but we feel pretty good about our position and haven’t seen any slowdown.
Michael Polark
Can I ask a real boring one in the updated guidance? It was FX benefit offset by incremental tariffs, and then you called out in the press release higher employee healthcare benefit costs. We all see what’s happening with managed care. I can attest Wolfe internally has been struggling with higher premiums for the coming year. Is that what this is?
And kind of — I’m interested in any fresh perspective because you’re obviously on the front-end of your fiscal year, and as I think we roll into calendar 2026, I suspect we’ll hear this from a lot of other companies. So what are you seeing on that front? Thank you.
Mike Tokich
Mike, it’s actually utilization of our employee healthcare benefits is where we’re seeing that. We did increase premiums as we typically do, low single digits, but at the same point in time, we are seeing just utilization causing that increase in costs.
Michael Polark
Okay. Thank you.
Operator
Our next question comes from Jason Bednar of Piper Sandler. Please go ahead.
Jason Bednar
Hey, good morning. Thanks for taking the questions. And Mike, congrats on a great career at STERIS. It’s been a pleasure working with you, and a pretty impressive cash flow figure for you to go out on here.
For my questions, I’ll start on order growth. Also, really impressive in the quarter for both Healthcare and Life Sci. I know this stuff can be lumpy sometimes, but those are really strong results, especially for a first quarter. Can you talk about the capital demand environment you’re seeing out there and how this order book and backlog contribute to the confidence you have on the full-year revenue guide?
Daniel A. Carestio
Yeah. The orders have remained strong in both sectors. We haven’t seen a slowdown. In particular, in the healthcare sector, we feel like we really have got a great portfolio and a very strong offering that has positioned STERIS very positively with our large customers who are looking to do more with partnership-type vendors, and STERIS fills that requirement.
So I — we feel pretty good and having a lot of backlog does bode well, obviously, for the future in terms of our ability to schedule and predict the timing of those shipments as they go out to customers over the fiscal year and into the next.
Jason Bednar
All right, great. And then, as a follow-up and dovetailing off of that cash comment I made to Mike. The balance here — cash balance here, is, I think, the highest it’s been in a few years. You paid down a little bit of debt in the quarter. You bought back a small amount of stock. What do you do from here? The stock is cheap by historical standards. There’s obviously a long M&A history at STERIS. Is M&A still that preferred use of cash? I think that’s — I think it is, but can you talk about what you’re seeing out there in that environment? What those discussions look like? Any preference you’re leaning towards in terms of allocating that cash?
Daniel A. Carestio
Yeah, I think we still have time to think about it. But what I would say is we have been historically active on the M&A front. We continue to be. We have done some small transactions over the past couple of quarters. We continue to have those opportunities going forward.
And as always, we’re always looking for larger opportunities, and those come in time, and when they do, they do. It’s hard to predict.
Mike Tokich
Hey, Jason, you will see over the next couple of quarters, without M&A activity, we will continue to build a cash position because we have almost no prepayable debt remaining. Everything that we will have on our balance sheet are either private placement notes, which I think the next tranche is due not till 2027. And then we have the public bonds, and off top of head, the first tranche, there was a 10-year tranche, and I think that’s 3032 or 3033. So that will — don’t be surprised if cash does continue to build in the short run.
Jason Bednar
All right.
Mike Tokich
And then obviously, we will continue to do buybacks as we typically do to offset dilution, mainly. We were, as you can imagine, blacked out this quarter because of my announcement. Unfortunately, we were able to take advantage of that, but we should get back to at least offsetting dilution in the short run.
Jason Bednar
All right. Helpful color. Thank you, and congrats again.
Mike Tokich
Thanks, Jason.
Operator
[Operator Instructions] Our next question comes from Mike Matson of Needham & Company. Please go ahead.
Mike Matson
Yeah, thanks. So a couple on the Life Sciences business. We’ve seen with regard to what’s happening in DC. So there’s been some cuts in vaccine spending — kind of reduced recommendations there, and then probably, we’re seeing kind of a pullback in pharma company spending. But then at the same time, there’s just talk about trying to push more drug manufacturing into the US or incentivize that. So how do you think all those things sort of shake out for that business?
Daniel A. Carestio
It’s a complicated landscape, is what I would say at this point. Anytime there’s a relocation of manufacturing that tends to drive some benefit for our capital business because obviously, new equipment to manage those aseptic environments. We’ve already seen the fall-off in vaccines from where it was three, four years ago. So I don’t think that’s really a headwind for us going forward, necessarily.
And given the growth that we’ve seen in other biological drugs and cell and gene therapies that require those aseptic environments, we feel pretty confident that despite whatever macro changes their way may be in terms of location or specific type of drug, the demand is going to remain fairly high.
Mike Matson
Okay, got it, thanks. And then just one on the free cash flow guidance increased high. Since your kind of earnings guidance is unchanged, I’d assume that’s mainly driven by working capital. Is that right? And, is that inventory or receivables, or something else? Thanks.
Mike Tokich
Mike, it is working capital, and it’s both inventory and receivables that we believe we will get increased cash flow from. And it’s about $50 million in total. And since we did overachieve this first quarter, we are carrying that through for the year.
Mike Matson
Got it. Thank you.
Operator
Our next question comes from Justin Wang of Morgan Stanley. Please go ahead.
Justin Wang
Hey everyone, I’m filling in for Patrick. Thanks so much for the questions. So last month, I think President Trump granted 39 ethylene oxide sterilization facilities a two-year regulatory relief from NESHAP compliance. However, I didn’t see any of STERIS’ EO sites included in that list. Could you clarify whether this is because your facilities didn’t need the extension to be compliant, or was this relief something that STERIS pursued but didn’t receive?
And more broadly, how do you see this regulatory development affecting the competitive landscape as well as your positioning in EO near term? Thank you so much.
Daniel A. Carestio
That’s a loaded question. So there’s a lot there. Well, first off, we didn’t apply for it because we don’t feel that we need it. We’ve been way out ahead of this going back four years now in terms of our facilities. And as I’ve discussed before, because many of the STERIS facilities are newer, generally speaking, in the EO landscape, the engineering modifications that we’ve had to make to ensure that we meet compliance with NESHAP were not as significant as maybe some other older facilities. So we’re confident in where we are and didn’t feel it necessary.
In terms of the competitive landscape, I mean, it extends the clock maybe on some facilities that may not elect to ultimately make the high-level investments in terms of meeting the compliance NESHAP. But I don’t think in the grand scheme of things it’s really all that material.
Justin Wang
Got it. Thank you so much.
Daniel A. Carestio
Yeah.
Operator
The next question comes from Dave Windley of Jefferies. Please go ahead.
Dave Windley
Hi, good morning. Thanks for taking my questions. Mike, congratulations on a good career. I hope I wasn’t the straw that broke the camel’s back that just made you think it was time to go. Jokingly.
Mike Tokich
Dave, your confidence was fine. Thank you.
Dave Windley
But when we were together in June, we talked a little bit about outlook — hospital outlook on volumes and potential impact of OB3,,,, and I think at the time hadn’t passed. Obviously, maybe hospitals were more tied up in trying to manage supply chain and issues around tariffs. I wondered if — with the passage of time, if management had more conversation with your hospital clients in terms of how they are assessing the potential impact of OB3 and declining coverage in Medicaid exchange, things like that. Thanks.
Daniel A. Carestio
Yeah, I mean, it’s — we’ll see how things play out, I guess, is what I would say. But generally speaking, I think it’s going to be a challenge for our customers, obviously from a cash — from a payment standpoint. It’s more of how they’re going to figure out how to manage that than it is a demand standpoint in terms of procedure rates ultimately.
So — and obviously, as indicated in this past quarter’s orders, we haven’t seen any pullback, nor have we seen any pullback in current procedure volumes. So I kind of go back to what I said there is we think it’s a payment reimbursement issue for our customers and for healthcare system in general, in the US that’s going to have to get sorted out under the new requirements.
Dave Windley
Got it. Thank you. And then a more boring one. If you could remind me on FX, does that largely flow through the — are you kind of operationally hedged on the FX, or do you see that have different effects on profitability than on the top line? Thanks.
Mike Tokich
No, we are pretty much hedged. Unfortunately, with the top line increasing by 200 basis points from an FX standpoint, by the time you get to the bottom line of that FX, which is about $14 million or so, $15 million, we’re going to have that offset the increased tariff. So — but in general, we are pretty much naturally hedged.
Dave Windley
Got it. Thank you very much.
Operator
And our next question comes once again from Michael Polark of Wolfe. Please go ahead.
Michael Polark
Hey. Thank you. Just one more for me. Dan, I’m curious where you think we are, what inning the — proverbial inning question on the ASC buildout in the US? And I asked specifically, we know ortho is on its way as a prime example, but this summer, Medicare provided a path for like cardiac ablation to be done in the ASC now, which is a high-volume EP case. So kind of what’s your feel out there? Is this still a mega trend? I’m curious for any fresh anecdotes on where you think we are in this cycle. Thank you.
Daniel A. Carestio
Sure. Yeah, I don’t think that really affects in terms of volumes going through AST. I think that’s more of a where procedures are going to be done as some shift continues, obviously…
Michael Polark
Sorry, I was asking with the lens of your capital business in healthcare, ASCs, ambulatory surgery centers. Yeah.
Daniel A. Carestio
Yeah. Okay, that makes much more sense. Yeah, whenever there’s relocation of where procedures occur from a capital perspective, that’s generally beneficial to us. I think there is — it also requires us to meet an unmet demand, which is where you’re going to have lower scale, less skill in terms of labor in those facilities. And we need to make sure that we have the proper training and compliance programs for those customers, ensure they can meet the demands of the patients in terms of providing safe and sterile reusable devices into the ASC market.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Julie Winter for any closing remarks.
Julie Winter
Thanks, everybody, for taking the time to join us this morning, and we look forward to catching up with many of you in the coming weeks.
Operator
[Operator Closing Remarks]