Sotera Health Company — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021; this is an annual filing, not a standalone fourth-quarter report. Comparison is primarily with FY2020. Sotera provides sterilization services, cobalt-60 supply and laboratory testing/advisory services through Sterigenics, Nordion and Nelson Labs.
Financial results and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net revenue | $931.5 million | $818.2 million | +13.9% reported; +12.2% constant currency |
| Gross profit / margin | $518.7 million / 55.7% | $443.6 million / 54.2% | Margin +1.5 percentage points |
| Operating income / margin | $256.7 million / 27.6% | $206.0 million / 25.2% | +24.6% |
| Net income (loss) | $117.1 million | $(37.5) million | Turned profitable |
| Adjusted EBITDA | $481.2 million | $419.9 million | +14.6% |
| Operating cash flow | $281.5 million | $120.6 million | + $161.0 million |
| Capital expenditures | $102.2 million | $53.5 million | + $48.7 million |
Adjusted EBITDA and Adjusted Net Income are non-GAAP measures; the company cautions they exclude, among other items, interest, share-based compensation, acquisition costs and EO-related litigation expenses. FY2021 Adjusted Net Income was $245.8 million, versus $99.1 million in FY2020.
Revenue growth reflected service revenue growth of 12.9% and product revenue growth of 20.4%. Sterigenics revenue rose 14.6%, Nordion 22.5% and Nelson Labs 7.1%. Nelson Labs’ segment income margin declined to 40.2% from 42.2%, partly due to lower PPE testing; Sterigenics and Nordion segment margins increased to 54.3% and 58.8%, respectively.
Cash and cash equivalents were $106.9 million at year-end. Total debt was approximately $1.764 billion, primarily variable-rate term-loan borrowings, and net debt was approximately $1.657 billion. The company reported $233.7 million of revolving-credit availability at December 31, including $113.8 million of letters of credit; availability rose to $278.4 million on January 6, 2022, after a temporary letter-of-credit overlap. Cash interest paid was $58.8 million. The company reported compliance with debt covenants.
Material changes versus FY2020
- Net income improved substantially, mainly reflecting lower interest expense: net interest expense fell to $74.2 million from $215.3 million. The reduction followed 2020 debt repayment using IPO proceeds and 2021 debt repricing and redemption.
- Operating cash flow increased largely because cash interest paid declined by $152.5 million; higher operating income also contributed, partly offset by increased cash taxes.
- Capital spending nearly doubled, including investment in facility expansion and environmental enhancements.
- Nelson Labs’ revenue included the 2021 BioScience Laboratories and Regulatory Compliance Associates acquisitions. The business also saw lower PPE-testing revenue as pandemic-related demand receded.
Outlook, risks and unusual items
- Spending outlook: Management expected FY2022 capital expenditures to exceed $140 million, including approximately $30 million for environmental facility enhancements and $32 million for cobalt development. Similar environmental and cobalt investments were anticipated in subsequent years. Expected 2022 cash interest was approximately $58.4 million, based on year-end debt and interest-rate assumptions.
- EO litigation and regulation: The company faces personal-injury and property-related EO claims involving Willowbrook and Atlanta, and litigation brought by the New Mexico Attorney General. It denies the allegations. The New Mexico preliminary injunction prohibits uncontrolled EO emissions from the Santa Teresa facility. The first Willowbrook individual trials were scheduled for 2022. The company said it could not reasonably estimate potential losses for certain matters and had accrued no material amounts for loss contingencies.
- Insurance exposure: The $10 million per-occurrence insurance limit for Willowbrook litigation was exhausted. The remaining $10 million aggregate limit was being used for Georgia and New Mexico EO-related litigation; approximately $2.2 million had been used by year-end. Future environmental-liability insurance excludes EO claims.
- Supply and operating risks: U.S. EO supply comes from a single supplier; a substantial portion of Co-60 supply comes from a limited number of Canadian and Russian reactors. The company estimated approximately 20% of long-term Co-60 supply would come from Russian reactors, with the share potentially reaching approximately 50% in a given year during periods of supply variability. Sanctions, logistics disruptions, reactor outages, inflation, changing sterilization regulations and COVID-19 impacts could affect costs or service capacity.
- Debt and rates: Debt bears variable interest rates. Management estimated a 1 percentage-point increase in LIBOR would raise annual interest expense by approximately $1.9 million after interest-rate caps. LIBOR transition and substantial leverage remain risks.
- Unusual FY2021 items: The company recorded $20.7 million of debt-extinguishment costs, $45.7 million of professional fees related to EO facilities and $2.3 million of Willowbrook closure costs. It also recognized a $5.1 million non-cash gain from derecognizing a Nordion asset-retirement obligation.
Most important facts for investors to verify
- Developments in EO litigation, trial outcomes, injunction compliance and the potential effect of limited insurance coverage.
- Whether planned environmental and cobalt capital projects meet budgets and schedules, and their effect on cash flow and returns.
- Co-60 availability, supplier concentration and any effect of geopolitical developments or sanctions on Russian supply and transport.
- Variable-rate debt exposure, refinancing and LIBOR-transition terms, and the company’s capacity to service debt while funding investment and acquisitions.
- Durability of revenue and margin growth, particularly as pandemic-related PPE testing declines and Nelson Labs integrates acquisitions.
- Reconciliation of non-GAAP results to GAAP results and the recurring nature of excluded costs. FY2021 financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.