Sotera Health Company — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Sotera provides sterilization, Co-60 products and services, laboratory testing, and advisory services through Sterigenics, Nordion, and Nelson Labs. Unless noted otherwise, figures are in U.S. dollars.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / prior period |
|---|---|---|
| Revenue | $236.8 million | $212.1 million; up 11.6% (12.7% excluding foreign exchange) |
| Gross profit and margin | $128.9 million; 54.4% | $115.4 million; approximately 54.4% |
| Operating income and margin | $53.5 million; 22.6% | $46.4 million; 21.9% |
| Net income and diluted EPS | $30.6 million; $0.11 | $11.1 million; $0.04 |
| Adjusted Net Income (non-GAAP) | $60.3 million | $51.5 million; up 17.0% |
| Adjusted EBITDA (non-GAAP) | $115.3 million | $105.3 million; up 9.5% |
| Operating cash flow | $50.0 million | $56.2 million |
| Capital expenditures | $35.5 million | $20.9 million |
Gross margin was broadly unchanged. Net income increased substantially, in part because Q1 2021 included a $14.3 million debt-extinguishment loss; Q1 2022 also benefited from lower reported net interest expense, including unrealized gains on interest-rate derivatives. The 2022 effective tax rate was 32.3%, versus 21.4% in 2021.
Cash and cash equivalents were $121.4 million at March 31, up $14.5 million from year-end. Current assets were $371.6 million and current liabilities $143.9 million. Long-term debt, net of issuance costs and discounts, was $1.745 billion; the $1.763 billion term loan matures in 2026. There were no revolver borrowings; $278.3 million remained available after letters of credit. The term loan’s reported weighted-average rate was 3.25% for Q1 2022. The company reported covenant compliance.
Operating cash flow was below the prior-year quarter, primarily due to a $12.0 million unfavorable change in working capital, partly offset by lower cash interest paid. Investing cash use was $35.5 million, largely capital spending; Q1 2021 included acquisitions that did not recur. Cash increased by $14.5 million during the quarter.
Material changes and segment results
- Sterigenics: Revenue rose 14.0% to $149.5 million and segment income rose 16.0% to $79.4 million, reflecting volume growth and pricing.
- Nordion: Revenue increased 31.2% to $34.0 million and segment income increased 37.1% to $18.9 million, driven by Co-60 volume and pricing. Nordion’s quarterly sales can vary with delivery timing and product mix.
- Nelson Labs: Revenue declined 3.2% to $53.3 million and segment income fell 26.1% to $17.0 million. Reduced pandemic-related testing and labor constraints more than offset acquisition contributions and pricing; segment margin declined from 41.9% to 32.0%.
- Service revenue increased 9.3%; product revenue rose 30.2%, principally reflecting higher Co-60 sales volume and favorable pricing. Company-wide pricing and Sterigenics volume growth supported results.
- Capital spending rose $14.6 million year over year as the company invested in capacity expansion and diversification of Nordion’s long-term Co-60 supply chain.
Outlook, risks, contingencies, and unusual items
Management did not provide specific revenue or earnings guidance in the supplied filing text. It expects cash, operating cash flow, and available credit to fund working capital, debt service, planned capital expenditures, and litigation costs for at least the next 12 months. The company remains interested in disciplined acquisitions.
Management reported sustained sterilization demand, but noted inflationary pressure, particularly on labor and utilities; labor and supply-chain constraints; and lower pandemic-testing demand affecting Nelson Labs. Some Co-60 supply is generated by Russian reactors; the company was monitoring potential disruption and reported no supply or revenue impact to date. Interest-rate, foreign-exchange, regulatory, operating, and COVID-19 risks also remain.
Ethylene oxide (EO) litigation remains a significant contingency. The filing reports approximately 780 plaintiffs in Illinois and approximately 300 in Georgia, alongside New Mexico Attorney General litigation and other proceedings. A preliminary New Mexico injunction prohibits uncontrolled EO emissions but does not require facility closure. Trials in three Illinois cases were scheduled for 2022. The company said it could not reasonably estimate certain potential losses; it had accrued no material loss-contingency amounts. EO-related environmental litigation insurance has $10 million per-occurrence and $20 million aggregate limits; the Illinois per-occurrence limit was exhausted, and $5.4 million of the remaining $10 million limit had been used for Georgia and New Mexico matters as of March 31.
Nordion’s appeal of its favorable $25 million business-interruption judgment was unsuccessful: the Supreme Court of Canada denied leave to appeal on March 31, 2022. Management also cited the pending Dutch appeal involving alleged historical emissions-permit violations; an escrow and cash collateral were maintained for potential claims. Adjusted Net Income and Adjusted EBITDA exclude, among other items, EO litigation costs, share-based compensation, amortization, and other adjustments; they are non-GAAP measures and should be considered alongside GAAP results.
Most important facts for investors to verify
- Developments, trial outcomes, potential damages, and remaining insurance coverage in EO-related litigation.
- Whether Russian-source Co-60 supply or broader supply-chain constraints affect Nordion or sterilization operations.
- Whether Nelson Labs’ testing volumes, labor availability, and margins recover after the Q1 decline.
- Debt-service capacity and exposure to benchmark interest rates as term-loan hedges and interest-rate caps change or expire.
- Execution and returns from the expanded capital-spending program, while tracking cash flow and leverage.
- Reconciliation and recurring nature of the items excluded from the company’s non-GAAP performance measures; the filing provides no specific numerical forward guidance.