Sotera Health Company — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Sotera provides sterilization services, Co-60 products, laboratory testing and advisory services through Sterigenics, Nordion and Nelson Labs.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net revenue | $248.2 million | $220.6 million | +12.5% |
| Gross profit | $127.1 million | $111.5 million | +$15.6 million |
| Operating income | $53.2 million | $33.4 million | +59.4% |
| Net income | $6.3 million | $2.8 million | +$3.5 million |
| Adjusted Net Income (non-GAAP) | $35.6 million | $35.9 million | -0.6% |
| Adjusted EBITDA (non-GAAP) | $111.9 million | $98.5 million | +13.7% |
| Net cash from operating activities | $9.7 million | $33.9 million | -$24.2 million |
| Capital expenditures | $34.9 million | $45.0 million | -$10.1 million |
Revenue growth excluding foreign-exchange effects was approximately 11.8%. Cost of revenues was 48.8% of revenue, compared with 49.5% a year earlier; operating expenses were 29.8% of revenue versus 35.4%. Interest expense rose 44.7% to $41.8 million, reflecting higher benchmark rates and principal balances and a smaller benefit from interest-rate derivatives. The reported weighted-average rate on outstanding debt was 8.39% at March 31, 2024, compared with 7.85% a year earlier.
Segments and material year-over-year changes
- Sterigenics: Revenue rose 4.1% to $166.5 million; segment income increased 3.6% to $85.8 million. Pricing and foreign exchange helped, partly offset by unfavorable volume and mix and inflation.
- Nordion: Revenue increased 180.8% to $24.0 million and segment income rose to $10.8 million from $1.5 million. The comparison reflects unusually light Q1 2023 sales and more favorable Co-60 harvest timing in Q1 2024; quarterly sales can fluctuate with harvest and delivery schedules.
- Nelson Labs: Revenue grew 10.8% to $57.7 million and segment income increased 8.8% to $15.3 million, driven mainly by volume, mix and pricing.
- Consolidated growth also reflected increased product revenue, primarily Nordion Co-60 shipments. SG&A fell 6.0%, largely because EO-facility litigation and professional-service costs were $7.6 million lower.
- Despite higher GAAP net income and Adjusted EBITDA, Adjusted Net Income was nearly flat. Non-GAAP measures exclude items including share-based compensation, amortization, refinancing costs and EO-related legal expenses; the company cautions these measures are not substitutes for GAAP results.
Liquidity, debt and cash flow
Cash and cash equivalents were $261.1 million at March 31, 2024, down $35.3 million from year-end, mainly following payment of the $35.0 million Atlanta EO settlement. Operating cash flow was $9.7 million; the settlement payment was a major use of cash, partly offset by working-capital changes. Investing activities used $34.9 million. Cash, including restricted cash, declined $38.8 million during the quarter.
Long-term debt had a $2.229 billion carrying value, with gross principal of approximately $2.259 billion; substantially all principal is due in 2026. The company had no revolving-credit borrowings and $400.1 million of stated revolver availability after $23.7 million of letters of credit. Finance lease obligations were $92.3 million. The company reported compliance with debt covenants. Its March 2024 credit-facility amendment extended the revolver’s maturity to the earlier of March 1, 2029 or 91 days before the term loans mature; total revolving commitments remain $423.8 million.
Outlook, risks and unusual items
- Management expects cash on hand, operating cash flows and available credit to cover working capital, debt service, expected capital spending and litigation costs for at least the next 12 months. No numerical earnings or revenue guidance is provided in the filing.
- The company is advancing Sterigenics capacity expansions, Nordion Co-60 development projects and Nelson Labs expansion and systems initiatives. It also continues to seek acquisitions.
- EO-related personal-injury and property claims remain pending in Illinois, Georgia, California and New Mexico. The company says losses in remaining or future EO tort cases are not probable, but future settlements are reasonably possible; it cannot estimate a reasonably possible loss or range. It intends to defend the cases. The $35.0 million Atlanta settlement was completed in January 2024; the company denies liability.
- Insurance recovery is uncertain. An insurer has appealed a judgment of $110.2 million for certain Willowbrook defense costs, and the company cannot predict how much, if any, additional insurance proceeds it will recover. The identified environmental-liability policy limits for the relevant EO litigation have been fully utilized, and future EO claims are excluded from its environmental coverage.
- New EPA NESHAP rules require additional EO emissions controls and monitoring. Compliance is due by April 6, 2026, with compliance demonstration within 180 days. Management believes planned investments position the company to comply, but gives no assurance; further modifications, capital spending and operating costs may be needed. EPA’s FIFRA registration decision was expected by Q3 2024, and proposed requirements could be challenging or conflict with NESHAP compliance.
- Other principal risks include EO and Co-60 supply disruptions, including potential Russian supply disruption; regulation and facility safety; litigation and liability; variable interest rates and significant leverage; inflation and supply-chain pressures; foreign exchange; and customer concentration in Nordion. Four Nordion customers each represented at least 10% of segment revenue in Q1 2024.
- Other unusual items include $1.8 million of refinancing and secondary-offering costs and $6.3 million of EO-facility professional-service costs in Q1 2024. A $27.7 million foreign-currency translation loss contributed to comprehensive loss of $20.9 million despite positive net income.
Key facts for investors to verify
- Whether Nordion’s Q1 volume increase is sustained or mainly reflects Co-60 harvest and shipment timing.
- Actual cost and timing of EO emissions-control upgrades, including the final FIFRA requirements and compliance with the April 2026 NESHAP deadline.
- Developments, potential exposure and insurance recoveries in EO tort and securities litigation; the filing provides no estimable loss range for future EO cases.
- Cash generation, planned capital expenditures and ability to service debt as variable-rate borrowing costs and the 2026 term-loan maturity approach.
- Whether operating performance supports reported GAAP results as well as non-GAAP measures, which exclude recurring and litigation-related costs.