Sotera Health Company — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This filing reports annual results; the supplied text does not provide standalone fourth-quarter financial results. Sotera provides outsourced sterilization, cobalt-60 (Co-60) supply, laboratory testing and advisory services through Sterigenics, Nordion and Nelson Labs.
Financial performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $1,003.7 million | $931.5 million | +7.8% reported; +10.2% constant currency |
| Gross profit / margin | $557.0 million / 55.5% | $518.7 million / 55.7% | Margin down approximately 0.2 percentage points |
| Operating income / margin | $248.4 million / 24.7% | $256.7 million / 27.6% | Income down 3.3% |
| Net income (loss) | $(233.6) million | $117.1 million | Primarily reflects $408.0 million EO settlement accrual |
| Adjusted Net Income* | $270.2 million | $245.8 million | +9.9% |
| Adjusted EBITDA* | $506.2 million | $481.2 million | +5.2%; margin approximately 50.4% vs. 51.7% |
| Cash from operations | $278.0 million | $281.5 million | Down $3.6 million |
| Capital expenditures | $182.4 million | $102.2 million | Up $80.2 million |
Segment trends: Sterigenics revenue rose 9.6% to $626.6 million and segment income rose 9.2% to $339.1 million; margin edged down to 54.1%. Nordion revenue rose 9.3% to $153.6 million and segment income rose 8.2% to $89.5 million; margin was 58.2%. Nelson Labs revenue increased 1.9% to $223.4 million, while segment income fell 11.9% to $77.6 million and margin declined to 34.7%, reflecting lower pandemic-related testing, staffing and inflationary costs, and acquisition mix.
Cash, debt and liquidity: Year-end cash and cash equivalents were $396.3 million, versus $106.9 million a year earlier. Gross debt was approximately $1,963.6 million; $200.0 million was drawn on the revolving facility during Q4 to enhance liquidity. The company reported $81.5 million of revolver availability after outstanding letters of credit. Cash interest paid was $75.8 million, up from $58.8 million; the weighted-average debt interest rate was 7.16% at year-end, versus 3.25% in 2021. The company was covenant-compliant at December 31, 2022.
*Adjusted Net Income and Adjusted EBITDA are non-GAAP measures. They exclude, among other items, EO litigation costs and settlement charges, share-based compensation, amortization, and other adjustments; they should be read alongside GAAP results.
Material changes versus FY2021
- Revenue increased across all three segments, but growth was partly offset by currency translation and lower pandemic-related PPE testing at Nelson Labs.
- Operating expenses rose 17.8% to $308.7 million; SG&A increased 24.0%, including higher EO litigation and professional fees, personnel costs and share-based compensation.
- Inflation raised labor, energy and direct-material costs. Pricing actions partly offset cost pressures, with timing effects weighing on Sterigenics margin.
- Operating cash flow was broadly stable, while investing outflow rose as capital spending accelerated. Financing cash inflow included the $200.0 million revolver draw.
- Net loss replaced prior-year net income, principally due to the $408.0 million charge for the proposed Willowbrook, Illinois EO litigation settlement.
Outlook, risks and unusual items
- Settlement and litigation: Binding term sheets signed January 9, 2023 provide for a $408.0 million settlement of more than 870 pending and threatened Willowbrook-related claims, subject to participation, dismissal and court-approval conditions. The company accrued the charge in FY2022. A separate September 2022 Illinois verdict of $358.7 million, including $320.0 million punitive damages, was appealed; settlement completion and related stays remained conditional. EO litigation in Georgia and New Mexico continues, and the company said potential losses there could not be reasonably estimated. EO claims are excluded from its future environmental-liability insurance; only about $1.1 million of the cited $10.0 million remaining policy limit was unused at year-end.
- Subsequent financing: On February 23, 2023, the company closed a new $500.0 million senior secured Term Loan B. It planned to use proceeds and available cash to fund the settlement, repay revolver borrowings and support liquidity and general corporate purposes. This is a post-year-end transaction, not year-end cash.
- Capital investment: Management expected 2023 capital expenditures of approximately $185–$215 million, including about $33.2 million for environmental enhancements and $31.6 million for cobalt development. Spending was expected to remain elevated for several years. No specific revenue or earnings guidance is provided in the supplied filing text.
- Key operating risks: Regulatory changes to EO emissions and sterilization, including expected U.S. EPA rulemaking; safety, permitting and community opposition; reliance on one U.S. EO supplier; and Co-60 supply concentration, including Russian reactor exposure amid sanctions and geopolitical risk. Management did not expect a material Co-60 supply or revenue impact in 2023, while continuing to monitor developments.
- Other risks: Variable-rate debt and significant leverage, inflation and foreign exchange, supply disruptions, alternative sterilization technologies, and ongoing legal and reputational exposure. A 1% increase in applicable benchmark rates was estimated to raise annual interest expense by approximately $12.6 million based on February 2023 debt and rates.
- Unusual non-litigation item: A $9.6 million impairment was recorded on an unconsolidated joint-venture investment after the project was discontinued. Goodwill impairment testing found no impairment at the 2022 assessment date.
- EY issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at December 31, 2022.
Important facts for investors to verify
- Whether the Willowbrook settlement’s opt-in thresholds and court-approval conditions were met, and the ultimate settlement funding and cash impact.
- Developments in the appealed $358.7 million verdict and the remaining Georgia, New Mexico and other EO matters, including potential judgments, security requirements and insurance recoveries.
- Use of the $500.0 million Term Loan B proceeds, repayment of revolver borrowings, resulting debt balance, interest expense and covenant headroom.
- Actual 2023 capital spending and progress on EO environmental controls and alternative Co-60 supply projects.
- Co-60 availability and Russian-related sanctions or logistics changes, as well as EO supply continuity and regulatory requirements.
- Nelson Labs’ recovery or continued weakness after lower pandemic-related testing, and whether pricing continues to offset labor and other inflationary costs.