Executive Summary / Key Takeaways

• STERIS plc (NYSE: STE) is a global leader in infection prevention, leveraging a diversified portfolio across Healthcare, Applied Sterilization Technologies (AST), and Life Sciences, underpinned by strong recurring revenue streams.
• Fiscal Year 2025 demonstrated solid performance with 6.2% total revenue growth and 6.1% constant currency organic growth, driven by volume, pricing, and strength in Healthcare consumables and services, alongside AST recovery.
• Strategic divestitures (Dental, CECS) have streamlined the portfolio and significantly improved the balance sheet, reducing total debt and enhancing financial flexibility for future investments and M&A.
• Proprietary technologies and a comprehensive service ecosystem provide a competitive moat, enabling market share gains in key areas like U.S. sterile processing and positioning the company for growth in high-demand areas like ambulatory surgery centers and aseptic manufacturing.
• Management's fiscal 2026 outlook anticipates continued 6-7% revenue growth and 7-10% EPS growth despite tariff headwinds, supported by restructuring savings, operational efficiencies, and robust demand in core markets.

Setting the Scene: A Foundation in Infection Prevention

STERIS plc stands as a critical player in the global healthcare and life sciences ecosystem, dedicated to supporting patient care through a relentless focus on infection prevention. The company's mission, "WE HELP OUR CUSTOMERS CREATE A HEALTHIER AND SAFER WORLD," is embodied in its comprehensive offering of products and services. Operating across three primary segments – Healthcare, Applied Sterilization Technologies (AST), and Life Sciences – STERIS provides everything from essential consumable products like detergents and sterility assurance items to complex capital equipment such as sterilizers and surgical tables, alongside vital services including equipment maintenance, instrument repair, and large-scale contract sterilization.

The demand for STERIS's solutions is fundamentally driven by macro trends like the aging global population, increasing demand for medical procedures (including preventive screenings), and the continuous push by healthcare providers and manufacturers for greater efficiency and safety. These secular tailwinds provide a stable backdrop for the company's operations.

STERIS's strategic approach combines organic growth, fueled by internal product and service development and investments in capacity, with targeted acquisitions designed to complement and expand its existing businesses. This blend has shaped the company's portfolio over time, including notable past integrations like Cantel Medical and the recent acquisition of BD (BDX)'s surgical instrumentation assets, alongside strategic divestitures like the Dental segment, aimed at optimizing the business mix and enhancing financial flexibility.

Technological Edge and Operational Excellence

At the heart of STERIS's competitive positioning lies its technological expertise and operational capabilities in sterilization and contamination control. The company offers a range of sterilization modalities, including Ethylene Oxide (EO) and Gamma irradiation (utilizing Cobalt-60), alongside newer technologies like Vaporized Hydrogen Peroxide. While reliance on materials like Cobalt-60 and EO presents supply and regulatory risks, STERIS is strategically expanding its capacity with accelerator-based technologies to mitigate potential Cobalt-60 supply concerns.

The company's investment in research and development, which saw expenses increase in fiscal 2025, is focused on enhancing sterile processing technologies, procedural products, and gastrointestinal endoscopy devices. A key aspect of its innovation is the development of solutions that offer tangible operational benefits to customers. For instance, ultra-concentrate chemistries like Prolystica offer significant efficiency gains, providing 10 times the uses per container compared to traditional formats, leading to reduced packaging waste and logistical benefits. Automated Endoscope Reprocessors (AERs) represent critical capital equipment placements that drive high-margin consumable and service pull-through.

Operational efficiency is further enhanced through the company's commitment to continuous improvement, applying Lean principles across its global operations via the Minimum Standard of Lean (MSoL) framework. This focus aims to streamline workflows, reduce waste, and improve service delivery, contributing to better outcomes for customers and supporting margin performance. While efforts to in-source production are underway to potentially reduce costs, the full realization of these efficiencies is a long-term endeavor.

Competitive Landscape and Strategic Positioning

The markets STERIS operates in are characterized by intense competition from a mix of large, diversified players and smaller, specialized companies. In the Healthcare segment, STERIS competes with broad-line manufacturers like 3M (MMM), Baxter (BAX), Ecolab (ECL), Getinge (GNGBY), and Stryker (SYK), as well as specialized providers like Olympus (OCPNY) and Pentax in services. The AST segment faces competition from Sterigenics International and other contract sterilization providers, alongside manufacturers who handle sterilization in-house. The Life Sciences segment competes with companies like Ecolab, Getinge, and Fedegari in highly regulated environments where technological innovation and cost-effectiveness are paramount.

Compared to larger, more diversified competitors like Stryker, Johnson & Johnson (JNJ), Medtronic (MDT), and Danaher (DHR), STERIS holds a smaller overall market share in overlapping medical equipment and life science sectors (estimated 8-12% compared to peers holding 10-20% or more in their core areas). While these larger players often boast higher gross margins (60-75% range for SYK and JNJ vs. STE's 45.3% TTM gross margin) and potentially faster R&D cycles, STERIS differentiates itself through its deep specialization in infection prevention and its comprehensive service ecosystem.

STERIS's strength lies in providing integrated solutions and services that extend beyond basic product sales, fostering strong customer relationships and driving resilient recurring revenue streams. This focus on the "full value of STERIS" through enterprise solution selling, particularly with large Integrated Delivery Networks (IDNs) and Group Purchasing Organizations (GPOs) in the U.S., has enabled the company to achieve market share gains in Healthcare consumables and services. The company is also strategically targeting growth in ambulatory surgery centers (ASCs) with dedicated portfolios and channels, recognizing the migration of procedures to these settings.

While competitors like JNJ and DHR benefit from broader portfolios and significant scale, and SYK and MDT have strong positions in surgical and medical devices, STERIS's specialized technologies and operational efficiencies in sterilization provide a competitive edge. For example, its VHP systems offer faster cycles, and its chemistry solutions provide resource efficiency, contributing to its competitive positioning in specific niches. However, the company faces vulnerabilities related to supply chain dependencies for certain key materials, which can impact costs more significantly than for competitors with more diversified sourcing or greater scale. The ongoing trend of industry consolidation and potential customer onshoring/reshoring also presents both opportunities (e.g., acquiring smaller players, leveraging regional facilities) and risks (e.g., changes in customer manufacturing footprints).

Financial Performance and Balance Sheet Strength

STERIS delivered a strong financial performance in fiscal year 2025 (ended March 31, 2025), with total revenues from continuing operations increasing by $320.8 million, or 6.2%, to $5.46 billion compared to fiscal 2024. This growth was underpinned by a 9.0% increase in Service revenues to $2.59 billion and a 12.2% increase in Consumable revenues to $1.69 billion, reflecting robust demand and pricing power, particularly in the Healthcare segment. Capital equipment revenues, however, saw a 6.0% decrease to $1.19 billion, primarily due to timing and challenging comparisons in Healthcare, although AST capital shipments more than doubled year-over-year.

Profitability saw mixed trends. The overall gross profit percentage increased to 44.0% in fiscal 2025 from 43.2% in fiscal 2024, benefiting from favorable pricing, mix, and productivity, partially offset by inflation and other costs. Operating income increased by 3.7% to $866.6 million, driven by higher volume and pricing, but impacted by increased labor costs, higher restructuring expenses ($46.0 million in FY25 vs $26.0 million in FY24), and significant legal costs, including a $48.2 million settlement charge related to EO litigation in Illinois. Selling, general, and administrative expenses rose by 6.5%, reflecting increased compensation and legal costs.

Despite these operational cost pressures, net income attributable to shareholders from continuing operations increased significantly to $611.6 million in fiscal 2025 from $553.3 million in fiscal 2024. Adjusted earnings per diluted share from continuing operations reached $9.22 in fiscal 2025, exceeding the revised outlook range, benefiting from lower corporate spending and improved profitability in Healthcare and Life Sciences, and notably, a significant decrease in interest expense ($86.3 million in FY25 vs $144.4 million in FY24) due to lower debt principal and interest rates.

The balance sheet saw a material transformation following the divestiture of the Dental segment in May 2024, which generated $787.5 million in cash proceeds. A majority of these proceeds were used to pay down debt, reducing total debt outstanding to $2.04 billion at March 31, 2025, from $3.21 billion at March 31, 2024. This deleveraging significantly improved the debt-to-total capital ratio to 23.6% from 33.7% and the gross debt to EBITDA ratio to approximately 1.4x at the end of fiscal 2025.

Cash flow generation was exceptionally strong. Net cash provided by operating activities increased to $1.15 billion in fiscal 2025 from $973.3 million in fiscal 2024, driven by improved working capital management, particularly higher accounts receivable collections and better inventory control. Free cash flow reached a record $787.2 million in fiscal 2025, well above guidance, despite increased capital expenditures of $370.1 million. This robust free cash flow generation supports the company's capital allocation priorities, including continued investments in capacity expansion, potential M&A, share repurchases ($200 million in FY25), and a consistent track record of increasing dividends (19th consecutive year).

Outlook and Growth Trajectory

Looking ahead to fiscal year 2026, STERIS anticipates continued momentum, projecting total and constant currency organic revenue growth from continuing operations in the range of 6% to 7%. This outlook assumes approximately 200 basis points of price contribution and no material impact from acquisitions or divestitures, nor significant foreign currency movements. Management expects all three segments – Healthcare, AST, and Life Sciences – to contribute growth within this 6% to 7% range.

Within the segments, AST services are expected to see high single-digit growth, partially offset by a decline in capital equipment compared to the strong fiscal 2025. Life Sciences is anticipated to benefit from continued strength in consumables and services, complemented by the delivery of a strong capital equipment backlog built late in fiscal 2025. Healthcare is expected to maintain mid-to-high single-digit growth, driven by resilient recurring revenue streams and the conversion of a robust capital equipment order backlog.

The adjusted earnings per diluted share outlook for fiscal 2026 is set at $9.90 to $10.15, implying a growth rate of 7% to 10% over fiscal 2025 adjusted EPS. This guidance incorporates an estimated $30 million net impact from tariffs, reflecting the company's exposure despite manufacturing a significant portion of products sold in North America within the region. The earnings growth is expected to be supported by approximately $20 million in restructuring cost savings from the plan initiated in fiscal 2025, lower ETO litigation expenses (anticipated $5 million in FY26), and operational efficiencies. These tailwinds are expected to largely offset headwinds from incentive compensation returning to target levels and the net tariff impact. The effective tax rate is planned at approximately 23.5%. At the high end of the EPS range, EBIT margins are expected to increase by approximately 20 basis points, indicating management's confidence in mitigating tariff impacts.

Capital expenditures in fiscal 2026 are planned to continue supporting facility expansions, particularly in Healthcare and AST, and ongoing maintenance, funded by strong operating cash flow. The improved balance sheet position provides ample capacity for strategic M&A opportunities as they arise.

Risks and Considerations

While the outlook is positive, several risks warrant investor attention. Geopolitical instability and changes in trade policy, including tariffs, pose potential headwinds through supply chain disruptions, increased costs, and reduced demand, although STERIS's North American manufacturing base mitigates some of this exposure. The evolving regulatory landscape, particularly concerning EO emissions, continues to present risks, including potential operational restrictions and ongoing litigation, despite the recent settlement for Illinois claims. While the company believes its practices comply with regulations and is vigorously defending remaining cases, the outcome of litigation is inherently uncertain and could result in material costs or liabilities exceeding insurance coverage.

Operational risks include potential supply chain disruptions for key materials with limited suppliers, labor market challenges impacting the ability to recruit and retain qualified personnel, and business continuity hazards. Cybersecurity threats are also a persistent concern, given the company's reliance on IT systems and remote work trends.

Execution risks related to integrating acquired businesses and realizing anticipated synergies from strategic initiatives and restructuring plans could impact financial performance. Competition remains intense across all segments, driven by technological innovation and pricing pressure, requiring continuous investment in R&D and operational efficiency to maintain market position. Changes in healthcare policy and reimbursement levels could also affect customer purchasing power.

Conclusion

STERIS plc has demonstrated resilience and strategic adaptability, successfully navigating a dynamic environment marked by portfolio optimization, operational challenges, and evolving market demands. The divestiture of the Dental segment has significantly strengthened the balance sheet, providing a solid financial foundation for future growth initiatives. The company's core strength lies in its diversified business model, robust recurring revenue streams from consumables and services, and a commitment to technological innovation and operational excellence in the critical field of infection prevention.

While facing competitive pressures and regulatory complexities, particularly around EO, STERIS's specialized expertise, comprehensive service offerings, and strategic investments in capacity and R&D position it favorably within its core markets. The strong fiscal 2025 performance, characterized by solid revenue growth, margin expansion in key segments, and record free cash flow, underscores the effectiveness of its strategy. The fiscal 2026 outlook for continued top-line and bottom-line growth, even accounting for anticipated tariff impacts, signals management's confidence in the underlying demand drivers and the company's ability to execute. For investors, STERIS represents a quality company with a defensible market position, a clear growth strategy, and improving financial health, poised to benefit from secular trends in healthcare and life sciences, making it a compelling consideration for long-term portfolios.