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Dan Carestio

Thanks, Mike, and good morning, everyone. Thank you for joining us to hear more about our third quarter performance and our outlook for the fiscal year. As you heard from Mike, we had another strong quarter. Looking at our segments, healthcare constant currency organic revenue grew 7% in the quarter, led once again by strong recurring revenue streams. Our outperformance in consumables and services continues to be driven by procedure volumes in the US as well as price and market share gains.
Healthcare capital equipment revenue declined 5% in the quarter due primarily to the timing of shipments. Orders grew over 10% in the third quarter, which is reflected in the $435 million healthcare backlog. While order growth remains robust, shipments were delayed by customer project delays. Margins improved nicely in healthcare, with volume, pricing, and positive productivity offsetting labor inflation.
Turning to AST, constant currency organic revenue grew 10% with 10% growth in services and a small decline in capital equipment shipments. Supporting growth in services, global medtech customers were stable, and we saw growth in bioprocessing demand above our expectations.
EBIT margins for AST were flat year over year and increased nicely sequentially. While the additional volume was helpful, we continue to be impacted by higher labor and energy costs. Constant currency organic revenue declined 1% for the Life Sciences Group in the quarter, driven once again by strong growth in consumables and services offset by a decline in capital equipment revenue.
As expected, the divestiture of the CECS business on April 1 impacted our as reported revenue. Margins increased to 42.6%, a 390-basis point improvement, benefiting from favorable mix, pricing, and the divestiture of CECS.
Turning to our outlook for 2025, with three quarters under our belt, we are tightening our ranges for revenue and earnings. As mentioned in the press release, the biggest change since last quarter is the unfavorable impact of currency rate changes impacting both revenue and profit.
In addition, we were shy of our revenue expectations in the third quarter for health care capital equipment. As a result, our outlook for as reported revenue from continuing operations is now approximately 6%. Constant currency organic revenue growth is also expected to be approximately 6%. Reflecting approximately $0.10 of impact from negative currency, adjusted earnings per diluted share are now expected to be in the range of $9.05 to $9.15.
Our expectations for free cash flow are unchanged at about $700 million with approximately $360 million in capital spending. Before I conclude, I would like to comment on the first ethylene oxide case to be tried against Isomedix, which ended in a mistrial last month. As you heard from Mike, we have incurred significant expenses defending Isomedix. But we believe that when the evidence of Isomedix' safety practices and the scientific data related to ethylene oxide exposure is fairly presented at trial, reasonable people will conclude that there is no connection between the unfortunate medical conditions of the claimants in Isomedix operations.
We believe the evidence presented during the four weeks of trial demonstrated that during the 44 months of Isomedix ownership, its conduct complied with applicable law and was reasonable, transparent, and protective of our people, our neighbors, and the environment. After the Court granted the plaintiff's request for mistrial, we learned that the majority of the remaining jurors supported a verdict in Isomedix's favor at the time that deliberations were terminated.
The Court has scheduled this first trial -- for the first case for retrial in May of this year, and we will continue to vigorously defend Isomedix in these cases. We have continued to invest in these facilities. We have created processes and procedures that meet or exceed the applicable environmental and regulatory standards.
That concludes our prepared marks for the call. Julie, would you please give the instructions so we can begin the Q&A.

Julie Winter

Thank you, Mike and Dan for your comments. Chuck, can you please give the instructions for Q&A, and we'll get started.

Question and Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions)
Jacob Johnson, Stephens.

Jacob Johnson

Hey, good morning, thanks for taking the questions. I guess I'll start with the inevitable healthcare capital equipment question. Dan, you mentioned timing of orders in 3Q and you talked about the updated guidance. You also talked about strong order growth. Do you think this is -- what you're seeing in in healthcare capital equipment is just related to timing of orders and is it kind of specific to 3Q or are you seeing any hesitancy from possible some kind of CapEx spend right now?

Dan Carestio

Now, the spending is still great because we're seeing the new orders come in. What we're seeing is just delays. The customers are just not ready from what they prescribed to us as the original want date when they make the order. And then, we're contacting customers a month or weeks in advance and they're saying, guys, we're not going to be ready to take it at the end of the month. I can't say definitively at this point that that's a trend because there's a couple big orders that have moved the needle in the last quarter or two. But generally speaking, it's something that we're seeing that's occurring with our customers in terms of pushing out some of the timing of shipping.

Jacob Johnson

Okay, that's helpful. And then maybe on [jetside] side of things, you mentioned bioprocessing, outpacing expectation at AST. I think we've seen that for some of the bioprocessing reports thus far this quarter. Just curious kind of what -- if you could unpack kind of the trends you're seeing in that bioprocessing end market and what that could mean as we look out over next year for AST?

Dan Carestio

Well I think in a in a general statement, last year Q2 Q3 was kind of the trough that we saw in terms of demand through our facilities which doesn't always necessarily correlate directly with the customers, because it depends on where inventory is in the supply chain and how much inventory sits at the end customer, right, their customer. But what you've seen as they've reported their earnings and the comments we've heard is that there seems to be some optimism and some positive trend of intake. And obviously, we're seeing that flow through our AST facilities.
I'm optimistic to think that we've sort of worked through the inventory challenges and we've been consistent in our messaging saying this has been a relatively small but high growth business for us for some time that we believe was taking a reset. And I believe that we're through that reset period and hope to have more normalized growth going forward.

Jacob Johnson

I'm hope you're right on that as well, I'll jump back into you. Thanks for taking the questions.

Dan Carestio

Sure thing.

Operator

Brett Fishbin, KeyBanc Capital Markets.

Brett Fishbin

Hey, thanks very much for taking the questions. Just one on the guidance. I noticed in the press release that you know there was an indication that you're assuming no tariffs for the remainder of the fiscal year, which I think makes sense at this point based on what we know. Just thinking ahead to FY26, could you help frame how you're viewing the potential risk in the scenario that tariffs are in fact reintroduced in regions such as Canada and Mexico? Thank you.

Mike Tokich

Yeah, Brett, we -- like others, we've done thorough analysis, looked at it many different ways. And the situation is so fluid at this point in time we're not going to comment directly as to what the impact could be. We're going to take more of a wait and see approach, but believe us, we are working hard behind the scenes to understand what the impact is and what our options are in order to help alleviate some of that impact. And if you remember we do have a facility in Quebec, Canada, and one facility in Monterey, Mexico, and in total they're about just under 10% of our cost of goods sold, just to give you some frame of reference.

Brett Fishbin

All right, that that's a helpful metric to keep in mind. Thank you. And then just a follow up question on cost. I think you mentioned, a step up in legal expense as one of the drivers of the elevated or increased OpEx this quarter. So just, wondering if you could touch on how we should be thinking about legal expense on a go forward basis, and maybe also just the decision or accounting reason to not adjust if they're abnormal type of expenses. Thank you.

Mike Tokich

Yeah, they are all recorded in our corporate expenses, they are not in the segment themselves. So this quarter, we incurred about just under $6 million in year-over-year increase in expenses and year-to-date we are about just over $10 million. We anticipate probably another couple of million dollars, $5 million in the fourth quarter from an expense standpoint as a headwind, that we've included in our forecast.

Operator

Michael Polark, Wolfe Research.

Michael Polark

Good morning. Question on AST, seeing the services accelerate the 10%, heard the bio process comments. Also heard, medtech customers stable, what does stable mean just like revenue flat can you give us an update on where you think inventory management headwinds are with that cohort?

Dan Carestio

Yeah, this is Dan sorry, that was probably vague. Not flat, but back to what we would expect is more normalized growth ranges and the low single digits in terms of volume.

Michael Polark

So just on AST kind of putting it all together, obviously 10-plus is then the target growth rate here we're seeing it in the quarter, when we saw the 7 a few quarters ago, okay, maybe that was a sign of the turn we kind of faded a little bit you just comment on your level of confidence that you know this feels like a solid kind of step up or is it still that? You're working to better understand what the situations really are, and we could have a chop around here on growth and AST for the next few quarters still?

Dan Carestio

Yeah, I don't think it's that far out. I think what I would say is we're cautiously optimistic in the trend that we've seen in the last couple quarters, I would caution you in that we have seen sort of a manufacturing bull whip effect from customers from time to time. So I'm not ready to declare victory and move on quite yet as it relates to one quarter of 10% growth, but we're enthusiastic to see the trend back in the direction where we'd like it to be.

Michael Polark

If I can ask one follow up on healthcare capital, I heard the comments timing of large ship, shipment delays timing of large products -- projects. Is there any part of this that STERIS is just kind of managing after a three year period of ebbs and flows with the supply chain stuff, kind of managing the revenue level in that line down to a place where you can expect to grow it again in fiscal '26? Is there any element of that in in the update today?

Dan Carestio

I think it's too early to say we're in our planning process now for next fiscal year and I know we're off cycle from a lot of companies, but we're just working hard to get through the fourth quarter deliver for the customers and we'll update you obviously at the next earnings call.

Michael Polark

Thank you.

Operator

Jason Bednar, Piper Sandler Companies.

Jason Bednar

Hey, good morning, thanks for taking the questions. Maybe first one just to start, margin performance was really strong in each of healthcare and Life sci. I think a record for healthcare, at least the highest we've seen in our model. So congrats on all that. I did want to ask just, can you talk about maybe sustainability of these margins, especially in healthcare as we think through some of the moving parts of possible mix shifts, restructuring savings, different dynamics that could impact here over the next several quarters.

Mike Tokich

Oh yeah, Jason, this is Mike. Yeah, I mean, if you look at healthcare and life sciences, both, they're both being impacted by favorable volume and mix and price. And health care actually for the first time all year, we actually started seeing productivity improvements, which is great because we've been looking forward to seeing that. I would say for the rest of this year, we probably are on track. We're not going to comment as to FY26 at this point in time. But we are definitely happy that we're seeing the leverage in health care.
And don't forget on that life sciences side, next year is going to be a lot harder because of that mix, favorable mix. Capital equipment should come back. It's down 30% year over year, so we're definitely getting a big benefit out of the higher consumables and service mix. But all in all, we're very pleased with the margin improvement across the board for our segments.

Jason Bednar

Alright, congrats. If I could shift over to the EL update. I know probably limited in what all we can talk about here, but we have the retrial set for May. Can you say, Dan, does the timing here of this trial, the retrial affect other cases that were in line to be tried? I think there was another one that had been set for the spring. I just don't know if that ends up getting pushed out because of this retrial they have to be tried in a certain order. And then, secondarily, can you comment on whether any additional cases have been added for you, beyond what was disclosed last quarter?

Dan Carestio

Yeah, sure, so you have it exactly right. The judge elected on the mistrial to push out what was originally scheduled as the second case group to be pushed later into this this summer sometime to be -- I don't remember the exact tentative date, but and pull the first case back to the retrying which is the May case. So no, we do not have any additional cases at this point.

Jason Bednar

Alright, thanks so much.

Operator

Patrick Wood, Morgan Stanley.

Patrick Wood

Hey guys, thank you so much, and apologies for the crackly voice on my end. I guess two for me, one would be obviously, under a slightly different political environment, do you think there's any opportunity for the intensity of the legislative change around EO to loosen up a little bit or any change in how that might be implemented, how do you feel about the new administration and and how that might change EO's use?

Dan Carestio

Well, I mean the rules are already out there both in the ID and in the [niche], and you know we've been working hard to make sure that we can we'll comply with that within the deadline. And I think we're incredibly well positioned to do that. Clearly, there's a shakeup going on at the EPA, but it's unlikely they're going to retract a rule that's already in place at this point in my view.

Patrick Wood

Yeah, I figured as much. And then the second one, bit random on the endoscopy side of the business, just curious what you're seeing, both in the demand for your scopes on the volume side, but then also on the reprocessing side, how things are going there. Thanks.

Dan Carestio

Yeah, in a general sense, I mean we've done -- we've continued to do really well, especially on the reprocessing side. We've placed a lot of capital and we have a lot of chemistry flowing through that capital, that's sort of the pull through that we that we've got over the last, I don't know, good year now of high capital shipments relative to Metivators products, the AARs. In terms of the endoscopy products, we're doing fine. We could be doing better, frankly. I think we're growing about at market in that space.

Patrick Wood

If -- one final one then if you had to guess how much of your like say consumables business was accounted for on the reprocessing side of the endoscopy just as a proportion, do you have a rough idea of where that sits?

Dan Carestio

Well, I don't know, Patrick.

Julie Winter

No, the only data point we get is the endoscopy in total is about $1 billion business.

Dan Carestio

That's inclusive of capital though everything, yeah.

Patrick Wood

Totally got it. Awesome. Thank you so much.

Dan Carestio

Sure thing.

Operator

(Operator Instructions) Mike Matson, Needham & Company.

Mike Matson

Yeah, thanks for taking my questions. Just want to ask one, in terms of your conversations with your customers and both the hospitals and the life science area, are you hearing any concerns about potential policy changes in the new administration maybe they're putting spending on hold until they kind of wait and see what what happens with potential changes there?

Dan Carestio

Yeah, no, we haven't seen it. In fact, we had a really good orders quarter both in health care and in Life Science Capital. After an abysmal year in terms of orders and life sciences, we, are cautiously optimistic that pharma is doing what they typically do in their normal cyclical buying patterns and getting back towards, investment.
In terms of our large health care system customers, we haven't seen any change in their direction. I know there's a lot of uncertainty about how they're going to get paid and all those different things from a patient from a governor government perspective, but we haven't seen it impact us at all at this point.
You gotta keep in mind what we talk about this frequently our product. The majority of our products, especially the equipment side, is really a utility, and it's really procedure driven. It's not a real -- most of what we sell is not reimbursed product, from a government perspective.

Mike Tokich

Just to give you a few numbers around that fact, we are up about 14% for the growth in health care year over year, which is very strong for us. And if you look at our backlog, right, our backlog is roughly almost $80 million to $85 million higher than what we anticipated in that $350 range. So there's no concern there from our part on the order structure from the healthcare customers.

Mike Matson

Okay, got it. And then just wanted to get an update on ambulatory surgery centers. I think you talked about that being sort of a growth driver in the past. Is that still the case? And do you have any products or anything you've launched to kind of target that call point?

Dan Carestio

Yeah, I know, we still see it that way. There's clearly migration going on out of large acute care into, satellite, smaller facilities, and that's a trend that's been going on for quite some time. We do have a portfolio that is specifically geared for that on the equipment side both in our surgical products as well as our SPD sterile processing equipment. And we do have dedicated channel in that space as well so we're putting resources and people in R&D investment into it and I'm confident that we're going to be well positioned in that space.

Mike Matson

Okay. Got it. Thank you.

Operator

Michael Polark, Wolfe Research.

Michael Polark

Appreciate it. Two more if I may. On healthcare services, I have a suspicion about how you're going to answer this, but can you just unpack, I mean, the growth drivers there really good performance teams again, I believe it's all organic, has been so for a while. is this sustainable? What's a good base case here on on growth profile as we roll into next year?

Dan Carestio

It's complicated is what I would say, but in a good way I think, we -- a lot of that is, a significant portion of our services businesses are traditional equipment services, right? And we've placed a lot of equipment over the last couple years and as the equipment comes off a warranty. We have a very high contract rate in terms of making sure that we get those folks on our contracts. And where they don't get our contracts, we have a great partnership program with the biomeds at the healthcare facilities to ensure that they're buying our parts and using us for consultation on service repair.
In terms of our general repair business for scopes and things like that, that's been a really strong piece of business for us. Maybe it even gets stronger people delay capital purchases on scopes and need more repair, not sure, hard to say, but generally speaking we don't see those trends reverting. The only thing I would say is that as inflation continues to come down. Our ability to get the level of price to cover our cost that we've seen over the last year and a half or so in the services business will probably come down a bit as well.

Michael Polark

Helpful, life sciences, maybe tying in the bio process take from AST. I know they're typically different kind of customer cohorts, but how do you assess the prospects for life sciences to return to organic growth over the next year or so what are you seeing from those customers?

Dan Carestio

Well, what I would say is life science is in a hole this year -- as a whole this year is not that impressive, but it's because of the capital slowdown that we've seen there. The engine of that business is really our consumables business, and we're seeing significant growth in that space. And actually a few quarters ahead of what we've seen in the bioprocessing customers of AST, where there's a lot more to stocking going on. So we're optimistic on the growth trends that we're seeing there and in our position in the aseptic manufacturing environment of Pharma.

Michael Polark

Thanks for taking the follow ups.

Dan Carestio

Sure thing.

Operator

David Turkaly, Citizens JMP.

David Turkaly

Hey, good morning, sorry I've been jumping around a little. I know you don't want to give guidance, so this may not fly, but I'll give it a shot. So Mike, you mentioned, 14% order growth, you mentioned the backlog, the level. And just looking at the trends and obviously realizing that healthcare has gotten a lot bigger, but in the overall business, it seems like there's a shift kind of towards that, even towards the mid to higher single digit. I'm just thinking out loud here that that that seems like something we've seen for a while now, maybe that's a new normal. I don't know if you have any comment on that.

Mike Tokich

No, we're very happy that where we are and where we have been with healthcare. Obviously, a nice try on trying to get us to talk about '26. But we will wait to talk about '26 until May. But again, we're very pleased where we're at. The only thing we're a little displeased with it's just the timing of the shipments, right, because we're taking the orders. It's taking us a little bit longer, as Dan talked about, to get those orders out the door. But at the end of the day, as long as it is in backlog, our cancellation rate is nil and has been nil, so we are confident that those orders get out and we'll talk more about the timing of when those shipments happen in next quarter.

David Turkaly

Great, thank you.

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. Please go ahead.

Julie Winter

Thanks everybody for taking the time to join us. We will be on the road a bit in both virtual and in-person conferences over the next few months and look forward to catching up with everyone.