STERIS Pivots to Shareholder Returns, Withholding Tax in Tow
Record free cash flow and a new $1B buyback signal a capital allocation shift, even as U.S. withholding taxes trim EPS accretion.
STE · Earnings Call · 2026-05-12
It's been a banner year for STERIS: revenue topped $6B, adjusted EPS rose 10% to $10.17, and free cash flow hit $982.9M. Yet the Q4 call and FY27 guidance reveal a company in transition—not in its businesses, which remain solid, but in how it deploys its growing cash pile and how it navigates a higher tax burden.
A Capital Allocation Shift
Historically, STERIS has been an M&A story, with management often describing the difficulty of finding the right deal. On the Q4 call, Dan Carestio acknowledged the shift: “We typically do small tuck-in M&A throughout the year. We're just calling these 2 out because they do have a material impact on the fiscal performance.” — Daniel Carestio, President and CEO · 2026-05-12 But the bigger news is the new $1B buyback authorization and a commitment to repurchase $200-300M annually—well above the historical "offset dilution" approach.
withholding tax is the new wrinkle. As Karen Burton explained: “We have this incremental hurdle when we do buybacks to overcome.” — Karen Burton, Senior Vice President and CFO · 2026-05-12 The company expects its effective tax rate to rise to 25% in FY27, driven by the U.S. withholding tax on repatriated cash used for dividends and buybacks. This is a company-specific tax dynamic not shared by most U.S. healthcare peers, and it directly trims the EPS accretion from the buyback.
Contrast this with the prior call in February 2026, where Dan said: “we will continue to do buybacks as we typically do to offset dilution mainly.” — Daniel A. Carestio, President and CEO · 2025-08-07 The change is meaningful: management is now willing to swallow the tax cost to return capital, signaling confidence in the balance sheet and cash generation.
We have this incremental hurdle when we do buybacks to overcome. So when we model the withholding tax, the lost interest, potentially having to borrow to go bigger, it starts to not make sense.
Tariffs and Tax: The New Normal
Tariffs continue to be a headwind, but STERIS sees them leveling off. On the call, Karen said: “the recent changes are favorable to us... tariffs are an okay thing for us looking at '27.” — Karen Burton, Senior Vice President and CFO · 2026-05-12 Yet they are not assuming any refunds: “We are not including any refunds in our '27 guidance.” — Karen Burton, Senior Vice President and CFO · 2026-05-12 This conservative stance stands in contrast to the broader market theme of Incremental tariffs and the IEEPA refunds seen elsewhere. The total tariff spend is expected to remain at $60-$65M in FY27.
The higher tax rate also pressures EPS growth—guidance of $11.10-$11.30 implies just 9-11% growth despite strong organic revenue growth. This is a deliberate trade-off as STERIS prioritizes shareholder returns over near-term EPS maximization.
Investing Through the Cycle
Beyond buybacks, STERIS is investing in organic growth. The company announced a new sterility assurance plant in Mentor, Ohio, a ~$60M project slated for completion in calendar 2027. Dan framed it as “a nearly fully automated manufacturing facility, really a center of excellence.” — Daniel Carestio, President and CEO · 2026-05-12 This aligns with the broader strategic push into automation and AI across its service workflows, which he said would "improve quality, increase productivity and enhance the customer experience." The center of excellence keyword is new to STERIS's trajectory, highlighting a shift from capacity expansion in AST to a renewed focus on manufacturing efficiency.
Life Sciences also showed signs of a comeback, with capital equipment orders recovering. “The real star in that business is our consumables, growing 8%.” — Daniel Carestio, President and CEO · 2026-05-12 This diversification across segments is reflected in the fundamentals: operating income jumped 47% yoy in Q4 and net income +51%. With free cash flow margin at 14.6% and interest coverage north of 20x, the balance sheet is in excellent shape to fund both growth and returns.
The stock (STE) is still ~11% below its January peak but has rallied 6.9% over the last 90 days, suggesting investors are warming to the story. The real question for FY27 isn't whether STERIS can grow—it's whether the tax bite and tariff drag will allow the margin expansion to shine through. With a disciplined buyback program and a new plant coming online, STERIS is positioning for the long term, even if the near-term EPS accretion is muted by the withholding tax.