Exchange: NYSE | Sector: Healthcare | Industry: Medical Devices
Q2 2025
Published: Nov 7, 2024
Earnings Highlights
Revenue of $1.33B up 7.3% year-over-year
EPS of $1.51 increased by 29.9% from previous year
Gross margin of 43.6%
Net income of 150.03M
""The impact to margins was about 200 basis points on that loss itself. And -- I mean, we had contemplated a loss, but not as large of a loss. So we were a little bit surprised by the amount. But it is a onetime event that will not recur."" - Mike Tokich
STERIS reported a solid QQ2 2025 performance with total revenue up 7% year over year (CC 7% as well), driven by strength in the Healthcare segment and a resurgence in recurring consumables and services. The company maintained a disciplined revenue mix despite margin pressure from labor inflation and higher energy costs, resulting in a 50 basis-point decline in gross margin to 43.6% and a 30-basis-point drop in EBIT margin to 22.2% (as a percentage of revenue). From a profitability perspective, net income rose 30% YoY to $150.0 million, supported by managed operating costs and favorable tax dynamics, and GAAP diluted EPS of $1.51 with an adjusted EPS of $2.14 for continuing operations, up 15% year over year. Management reaffirmed the full-year guidance of 6% to 7% constant-currency organic revenue growth and adjusted EPS of $9.05 to $9.25, with free cash flow of about $700 million and capex of roughly $360 million.
The quarter underscored the diversified, recurring-revenue tilt of STERIS, led by Healthcare, where constant-currency revenue grew 7% andbacklog in healthcare capital equipment rose meaningfully (backlog at $405 million). AST (Applied Sterilization Technologies) posted a solid 9% constant-currency growth, aided by services and early signs of bioprocessing demand, though margins were pressured by labor and energy costs and a one-time capital-order loss that the company described as non-recurring. Life Sciences delivered mid-single-digit growth fueled by consumables, while CECS divestiture effects moderated reported revenue in the Life Sciences segment. The management team, while optimistic about bioprocessing upside in the second half, cautioned that exit-rate double-digit growth in AST is unlikely to occur this year. The company highlighted weather-related shipment delays and a strengthening backlog as near-term factors influencing equipment shipments, but emphasized that higher-margin consumables and services help offset capital-equipment volatility. Overall, STERIS remains positioned for continued cash-flow generation and prudent capital allocation, with potential for tuck-in acquisitions and share repurchases to supplement organic growth.
Key Performance Indicators
Revenue
1.33B
QoQ: 3.86% | YoY:7.33%
Gross Profit
578.79M
43.55% margin
QoQ: 1.07% | YoY:5.96%
Operating Income
219.67M
QoQ: 18.40% | YoY:18.19%
Net Income
150.03M
QoQ: 3.19% | YoY:30.10%
EPS
1.52
QoQ: 3.40% | YoY:29.91%
Revenue Trend
Margin Analysis
Key Insights
Revenue: $1.328912 billion in Q2 2025, up 7% YoY; organic growth 7% in CC terms. - Gross margin: 43.56% (down ~50 bps YoY). - Operating income: $219.666 million; operating margin ~16.53%. - Net income: $150.034 million; net margin ~11.29%. - EPS: GAAP diluted $1.51; GAAP basic $1.52; adjusted EPS (continuing operations) $2.14, up 15% YoY. - Cash flow: operating cash flow $250.725 million; free cash flow $148.833 million; YTD free cash flow $344.5 million. - Backlog: Healthcare capital equipment backlog at $405 million. - Balance sheet: cash and equivalents $172.2 million; total debt $2.3998 billion; net debt $2.2276 billion; total equity $6.5935 billion; current ratio 2.41x; debt to EBITDA ~1.5x. - Guidance (FY2025): 6%-7% constant-currency organic revenue growth; adjusted EPS $9.05-$9.25; free cash flow ~ $700 million; capex ~$360 million.
Financial Highlights
- Revenue: $1.328912 billion in Q2 2025, up 7% YoY; organic growth 7% in CC terms. - Gross margin: 43.56% (down ~50 bps YoY). - Operating income: $219.666 million; operating margin ~16.53%. - Net income: $150.034 million; net margin ~11.29%. - EPS: GAAP diluted $1.51; GAAP basic $1.52; adjusted EPS (continuing operations) $2.14, up 15% YoY. - Cash flow: operating cash flow $250.725 million; free cash flow $148.833 million; YTD free cash flow $344.5 million. - Backlog: Healthcare capital equipment backlog at $405 million. - Balance sheet: cash and equivalents $172.2 million; total debt $2.3998 billion; net debt $2.2276 billion; total equity $6.5935 billion; current ratio 2.41x; debt to EBITDA ~1.5x. - Guidance (FY2025): 6%-7% constant-currency organic revenue growth; adjusted EPS $9.05-$9.25; free cash flow ~ $700 million; capex ~$360 million.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
1.33B
7.33%
3.86%
Gross Profit
578.79M
5.96%
1.07%
Operating Income
219.67M
18.19%
18.40%
Net Income
150.03M
30.10%
3.19%
EPS
1.52
29.91%
3.40%
Key Financial Ratios
currentRatio
2.41
grossProfitMargin
43.6%
operatingProfitMargin
16.5%
netProfitMargin
11.3%
returnOnAssets
1.46%
returnOnEquity
2.28%
debtEquityRatio
0.36
operatingCashFlowPerShare
$2.54
freeCashFlowPerShare
$1.51
dividendPayoutRatio
37.5%
priceToBookRatio
3.63
priceEarningsRatio
39.88
Net Income vs. Revenue
Expense Breakdown
Management Commentary
- Recurring revenue resilience: Management attributed continued outperformance in consumables and services within Healthcare, supported by U.S. procedure volumes and contract gains. (Transcript: “Healthcare constant currency organic revenue grew 7% in the quarter, led once again by strong recurring revenue streams.â€)
- Bioprocessing optimism in AST: Dan Carestio signaled that bioprocessing revenue should grow in the second half, though near-term results did not meet earlier hopes for a double-digit exit in AST, reflecting ongoing normalization in medtech demand. (Transcript: “We’re actually very optimistic on bioprocessing being accretive to our growth, especially in the second half of the year.†and “I don’t believe we’re going to exit at a double-digit multiple at this point.â€)
- Margin pressures and one-time loss: The company cited labor inflation and energy costs as margin headwinds and noted a onetime $impact from a capital-equipment loss in Med-X that reduced margins more than expected. (Transcript: “the impact to margins was about 200 basis points on that loss itself.†and “onetime event that will not recur.â€)
- Backlog and shipments dynamics: Healthcare capital equipment revenue was down modestly due to timing, but orders rose >30%, with a meaningful backlog, and shipments were affected by weather events late in the quarter. (Transcript: “Orders grew over 30% in the second quarter, which reflected in the $405 million healthcare backlog.†and “weather-related delays and things like that with the hurricanes at the end of the quarter that did impact some shipments.â€)
- Outlook discipline: The company maintained full-year expectations and emphasized the diversification of segments as a stabilizing factor for margins and cash flow. (Transcript: “For the full year, we are reiterating our outlook from continuing operations, including 6% to 7% constant currency organic revenue growth and adjusted earnings per diluted share of $9.05 to $9.25.â€)
"The impact to margins was about 200 basis points on that loss itself. And -- I mean, we had contemplated a loss, but not as large of a loss. So we were a little bit surprised by the amount. But it is a onetime event that will not recur."
— Mike Tokich
"We’re actually very optimistic on bioprocessing being accretive to our growth, especially in the second half of the year. And I think at this point, we’re halfway through the year. And although the growth has been nice, it’s not maybe where I had hoped it would be from a medtech perspective at this point. And although we see it continuing to improve based on run rate, I don’t believe we’re going to exit at a double-digit multiple at this point."
— Dan Carestio
Forward Guidance
- Growth outlook: Management maintains 6%-7% CC organic revenue growth for the full year 2025, with Healthcare expected to grow mid- to high-single digits, AST high-single-digit, and Life Sciences roughly flat, offset by divestiture effects in CECS. - Profitability: Margins are expected to be about flat for the year, implying limited year-over-year margin expansion despite the revenue growth, due in part to ongoing labor and energy cost pressures. - Cash flow and capital allocation: Free cash flow guidance remains about $700 million, with capex around $360 million, leaving room for potential tuck-in acquisitions and share repurchases. - Key metrics investors should monitor: (1) the trajectory of bioprocessing demand in AST and its impact on margins; (2) the timing and execution of healthcare capital equipment shipments and related backlog; (3) cost inflation and the company’s ability to pass through higher labor/energy costs; (4) progress on potential strategic acquisitions and/or additional share repurchases; (5) ongoing litigation developments and related financial implications.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
STE Focus
43.55%
16.50%
2.28%
39.88%
OFIX
65.70%
-10.90%
-6.13%
-3.66%
NUVA
71.80%
11.30%
0.83%
74.01%
GKOS
76.40%
-28.70%
-7.60%
-29.45%
HSKA
42.30%
-8.57%
-1.26%
-46.61%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
STERIS offers a defensible investment thesis built on a diversified, cash-generative platform with meaningful recurring revenue, a resilient free cash flow profile, and a multi-segment exposure to healthcare services, consumables, and bioprocessing. The QQ2 2025 results demonstrate robust top-line momentum (+7% CC) driven by Healthcare and AST, coupled with a clear path to mid-single-digit revenue growth in Life Sciences. The company’s ability to fund a ~$700 million annual free cash flow target while reducing net debt supports a constructive stance on capital returns and potential tuck-in acquisitions. However, investors should monitor margin trajectory given ongoing labor/energy cost pressures and the effect of one-off capital losses in AST, which temporarily weighed on margins in the quarter. Management’s guidance remains credible, with 6%-7% CC organic revenue growth and flat full-year margins as the base case; upside hinges on sustained bioprocessing demand, improved utilization in AST, and timely execution of healthcare capital shipments. In a relative-value context within healthcare devices, STE benefits from diversification and cash-flow resilience, though it trades at a higher price-to-earnings and price-to-book multiple versus broad med-tech peers, reflecting its defensible cash-generation profile and growth optionality.
Key Investment Factors
Growth Potential
- Bioprocessing demand in AST represents a meaningful growth vector; the company expects second-half acceleration in bioprocessing revenue, which should support margin resilience and higher-margin services in AST over time.
Profitability Risk
- Labor and energy cost inflation remain a persistent margin headwind; the onetime Med-X equipment loss highlights execution risk around capital projects; ongoing supply/demand volatility in the medtech market and potential litigation exposure could weigh on earnings and sentiment.
Financial Position
- Balanced mix of Healthcare, AST, and Life Sciences provides revenue stability; net debt at ~$2.23B with gross leverage ~1.5x; robust free cash flow target (~$700M) supports deleveraging, buybacks, and potential M&A tuck-ins.
SWOT Analysis
Strengths
Diversified, balanced portfolio across Healthcare, AST, and Life Sciences reduces exposure to any single end-market cycle.
Strong recurring revenue from consumables and services supports earnings stability and cash flow.
Significant operating cash flow generation supports deleveraging and return of capital.
Healthy backlog in Healthcare capital equipment underpins near-term visibility.
Weaknesses
Margin compression from persistent labor inflation and higher energy costs.
Volatility in capital equipment timing can create quarterly revenue headwinds.
AST margin headwinds linked to a one-time capital-order loss and ongoing cost pressures.
Opportunities
Bioprocessing market secular growth in AST provides a path to higher-margin growth in second half of fiscal year.
Expanding consumables/services penetration through IDM GPOs and procedural-volume growth in the U.S.
Potential tuck-in acquisitions funded by strong free cash flow and conservative leverage.
Share repurchases to optimize capital structure if M&A timing is unfavorable.
Threats
Industry-wide inflation in labor and energy costs pressuring margins across segments.
Regulatory/litigation risks associated with Isomedix-related matters and other legal proceedings.
Macro uncertainty affecting hospital capital budgets and global healthcare spending cycles.
Supply chain disruptions or tariffs impacting equipment shipments and project timing.