Sotera Health Company — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. Sotera provides sterilization, cobalt-60 products, laboratory testing and advisory services through Sterigenics, Nordion and Nelson Labs. Amounts below are U.S. dollars.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $212.1 million | $188.2 million | +12.7% |
| Gross profit / margin | $115.4 million / 54.4% | $96.5 million / 51.3% | Margin +3.1 percentage points |
| Operating income / margin | $46.4 million / 21.9% | $44.9 million / 23.8% | Income +3.3% |
| Net income (loss) | $11.1 million | $(2.0) million | Improved $13.1 million |
| Adjusted Net Income | $51.5 million | $23.7 million | +117.0% |
| Adjusted EBITDA | $105.3 million | $91.9 million | +14.6% |
| Operating cash flow | $56.2 million | $5.7 million | + $50.5 million |
| Capital expenditures | $20.9 million | $13.0 million | +$8.0 million |
Service revenue rose 12.7% and product revenue rose 12.8%. Growth reflected Iotron, pricing and organic volume gains at Sterigenics, and increased testing demand related to COVID-19 protective equipment at Nelson Labs. Foreign exchange also contributed. Cost of revenue grew more slowly than sales, lifting gross margin. SG&A increased 41.6% to $52.5 million, principally due to EO litigation and professional fees, public-company costs and share-based compensation. Operating income grew more slowly than revenue as operating expenses increased.
Net interest expense fell to $21.3 million from $56.6 million, reflecting lower debt and borrowing rates. Q1 2021 results included a $14.3 million debt-extinguishment charge from the term-loan repricing; other income included a $1.2 million gain related to the Nelson Labs Fairfield noncontrolling-interest purchase. Q1 2020 included a $12.2 million income tax benefit, versus $3.0 million of tax expense in Q1 2021. Adjusted Net Income and Adjusted EBITDA are non-GAAP measures and exclude, among other items, amortization, share-based compensation, EO litigation costs and debt-repricing costs.
Financial position, liquidity and debt
At March 31, 2021, cash and cash equivalents were $108.0 million, up from $102.4 million at December 31, 2020. Current assets were $328.4 million and current liabilities were $138.0 million. Long-term debt, net of issuance costs and discounts, was $1.838 billion; principal debt was approximately $1.864 billion. There were no revolving-credit borrowings, and $281.7 million remained available after $65.8 million of letters of credit. Cash was $101.8 million at foreign subsidiaries; the company reported no material restrictions on access, subject to potential tax consequences.
Operating cash flow improved substantially, primarily because cash interest paid declined by $43.8 million; cash paid for income taxes increased by $9.7 million. Investing cash outflow was $46.5 million, including BioScience and the Nelson Labs Fairfield interest purchases, as well as higher capital spending. Cash flow after capital expenditures was approximately $35.2 million. Total liabilities were $2.311 billion and total equity was $465.7 million.
In January, the term-loan spread over LIBOR was reduced from 4.50% to 2.75% and its floor from 1.00% to 0.50%. Management estimated annual cash interest savings of approximately $40 million based on principal at the amendment date; 2021 savings are partly offset by refinancing charges. In March, the revolving facility spread was reduced and its maturity extended to June 2026. The term loan and first-lien notes mature in 2026. Approximately 81% of variable-rate borrowings were covered by interest-rate caps limiting LIBOR exposure to the 0.50% floor.
Material changes, outlook and risks
- Segments: Sterigenics revenue was $131.2 million (+11.8%) and segment income was $68.5 million (+12.1%). Nordion revenue was $25.9 million (+9.7%) and segment income was $13.8 million (+5.9%). Nelson Labs revenue was $55.1 million (+16.5%) and segment income was $23.1 million (+29.8%).
- Acquisitions and investment: BioScience was acquired for approximately $13.2 million net of cash acquired, plus repayment of $1.9 million of its debt. Sotera paid $12.4 million for the remaining 15% of Nelson Labs Fairfield. Agreements to buy remaining interests in two China subsidiaries for $8.6 million were expected to close in Q2 2021.
- Capacity and demand: Management described continued investment in capacity, EO facility enhancements and cobalt development, and expansion of Nelson Labs testing capacity. Nordion sales may fluctuate between quarters because of delivery timing, customer installation schedules and product mix.
- Liquidity outlook: Management expected cash on hand, operating cash flow and available credit to fund operations, capital expenditures, litigation costs and debt service for at least the next 12 months. No formal revenue or earnings guidance is provided in the filing.
- EO litigation and contingencies: Personal-injury and other EO-related matters in Illinois, Georgia and New Mexico remain ongoing; the company says losses are not currently probable or reasonably estimable and has recorded no contingency reserve. Environmental-liability insurance is limited to $10 million per occurrence and $20 million aggregate; the per-occurrence limit for Willowbrook government and tort litigation had been fully used by June 30, 2020. An adverse outcome could materially affect results or financial condition. Willowbrook operations have permanently ceased. The New Mexico Attorney General’s case sought controls on uncontrolled emissions; a preliminary-injunction hearing was scheduled for May 26, 2021.
- Other risks and unusual items: COVID-19 effects remain uncertain. The filing highlights potential supply disruption or cost increases for ethylene oxide and cobalt-60, regulation and safety risks, legal proceedings, and substantial leverage. The FM Global judgment of $25 million plus interest and costs was under appeal; any proceeds are a contingent gain and had not been recognized. Management reported disclosure controls effective and no material change in internal controls during the quarter.
Most important facts for investors to verify
- Whether revenue growth, including COVID-related testing demand, pricing and acquired-business contributions, continues in subsequent quarters.
- Actual interest savings after repricing, debt service requirements and the company’s capacity to manage its substantial leverage.
- Developments in EO litigation and regulation, potential exposure beyond insurance limits, and whether any loss becomes estimable.
- Cash conversion and capital spending needs as the company expands capacity and integrates acquisitions.
- Completion and terms of the planned China noncontrolling-interest purchases, and progress on BioScience integration.