Business context and reporting period
Sotera Health Company filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. It provides sterilization and irradiation services, Co-60 products, laboratory testing and advisory services through Sterigenics, Nordion and Nelson Labs.
Key financial results
Amounts are in U.S. dollars; figures below are millions except per-share amounts.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $266.6 | $251.9 | $503.4 | $464.1 |
| Gross profit | $150.4 | $143.8 | $279.3 | $259.1 |
| Operating income | $71.5 | $78.3 | $125.0 | $124.6 |
| Net income | $30.4 | $42.6 | $61.1 | $53.7 |
| Diluted EPS | $0.11 | $0.15 | $0.22 | $0.19 |
| Adjusted EBITDA (non-GAAP) | $136.1 | $134.6 | $251.5 | $239.9 |
| Operating cash flow | Not presented for quarter | $108.3 | $134.3 |
Q2 gross margin was approximately 56.4% versus 57.1% a year earlier; operating margin was 26.8% versus 31.1%. For the first half, gross margin was approximately 55.5% versus 55.8%, and operating margin was 24.8% versus 26.9%.
At June 30, cash and cash equivalents were $139.6 million, plus $1.1 million of restricted cash. Current assets were $398.7 million and current liabilities $142.0 million. Long-term debt had a $1.764 billion principal balance and $1.746 billion carrying value, net of debt costs and discounts. There were no revolver borrowings; $277.4 million remained available after letters of credit. The company reported compliance with debt covenants.
Six-month capital expenditures were $71.6 million, up from $44.8 million. Net cash provided by operations was $108.3 million; investing activities used $71.2 million and financing activities used $1.1 million. Management cited higher cash taxes and interest payments as principal reasons operating cash flow declined year over year.
Material changes versus the prior comparable period
- Q2 revenue rose 5.8% (about 8.5% excluding foreign exchange), while net income fell 28.6%. SG&A increased 26.7%, including higher EO-litigation and professional-service costs, share-based compensation, personnel and travel expenses.
- Q2 operating income declined 8.7%. The quarter included a $9.6 million impairment of the Auralux joint-venture investment, which was written down to zero after the venture was discontinued. Lower net interest expense partly offset these pressures.
- For the first half, revenue rose 8.5% (about 10.4% excluding foreign exchange), net income rose 13.7%, and Adjusted EBITDA rose 4.8%. Operating income was nearly unchanged as inflationary costs and higher SG&A offset revenue growth.
- Sterigenics led growth: Q2 segment revenue increased 8.7% and segment income 6.9%. Nelson Labs faced lower pandemic-related testing demand; its Q2 segment income fell 11.6%, and first-half segment income fell 18.8%. Nordion Q2 segment income decreased 3.8% despite higher revenue.
- First-half operating cash flow decreased $26.0 million year over year, while capital expenditures increased $26.9 million. Cash increased by $33.7 million from year-end 2021.
Outlook, commentary, risks and unusual items
Management said it expects cash on hand, operating cash flows and available credit to cover working capital, debt service, planned capital expenditures and litigation costs for at least the next 12 months. The filing provides no specific revenue, earnings or margin guidance. Management described continued sterilization demand and ongoing investment in capacity, facility improvements and Co-60 supply resilience.
Management reported no material impact to date from possible Russian Co-60 supply disruption, but said it continues to monitor the risk. Other cited operating pressures include inflation, labor-market constraints, supply-chain limits, regulatory update delays and declining pandemic-related testing. Nordion revenue may fluctuate between quarters due to delivery and customer-installation timing.
EO-related personal-injury and other litigation remains a significant uncertainty. Approximately 780 plaintiffs are involved in Illinois proceedings and approximately 300 in Georgia personal-injury cases; a New Mexico Attorney General case is also pending. The filing says no material amounts were accrued for loss contingencies and that the outcomes or losses cannot be reasonably estimated in certain matters. EO litigation and related professional services cost $17.7 million in Q2 and $35.7 million in the first half. Approximately $4.0 million of specified insurance coverage remained at June 30; coverage for future alleged EO environmental liabilities is excluded. An August 3, 2022 court order found an insurer had a duty to defend the Willowbrook litigation, potentially allowing recovery of defense costs.
Other notable items include the $9.6 million Auralux impairment, substantial foreign-currency translation losses in other comprehensive income ($46.0 million in Q2), and interest-rate exposure on variable-rate debt. The company entered into additional interest-rate caps in May 2022; its benchmark rate was expected to transition from LIBOR to term SOFR by June 30, 2023 or earlier if elected.
Most important facts for investors to verify
- Progress, trial outcomes, potential damages and insurance recoveries for EO-related litigation, including the effect of the August 3 insurer ruling and remaining coverage.
- Whether inflation, labor and supply-chain costs can be offset by pricing and volume growth, especially at Nelson Labs as pandemic-related testing declines.
- Co-60 supply continuity and the timing and returns of capacity-expansion capital spending.
- Variable-rate debt exposure, future interest costs and the LIBOR-to-SOFR transition; the principal term loan matures in 2026.
- Cash-flow conversion and the sustainability of management’s liquidity assessment given litigation spending, capital expenditures and debt service.
- How much reported performance depends on non-GAAP adjustments: Adjusted EBITDA excludes, among other items, EO litigation costs, share-based compensation, amortization, impairment and interest expense.