Sotera Health Company — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual report, not a standalone fourth-quarter report. Sotera provides sterilization, cobalt-60 (Co-60) supply, laboratory testing and advisory services through Sterigenics, Nordion and Nelson Labs.
Key financial results
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net revenue | $1,049.3 million | $1,003.7 million | +4.5% |
| Gross profit / margin | $577.2 million / 55.0% | $557.0 million / 55.5% | Margin down 0.5 percentage points |
| Operating income / margin | $276.7 million / 26.4% | $248.4 million / 24.7% | Income +11.4% |
| Net income (loss) | $51.4 million | $(233.6) million | Improved, principally reflecting the prior-year Illinois settlement charge |
| Adjusted Net Income (non-GAAP) | $230.1 million | $270.2 million | −14.8% |
| Adjusted EBITDA (non-GAAP) | $528.0 million | $506.2 million | +4.3% |
| Net cash from (used in) operations | $(147.7) million | $278.0 million | Decline mainly reflects funding the Illinois settlement |
| Capital expenditures | $215.0 million | $182.4 million | + $32.6 million |
Revenue gains were primarily driven by pricing, partly offset by lower volumes and unfavorable mix. Service revenue rose 4.7% and product revenue rose 3.5%. Interest expense, net increased to $142.9 million from $80.1 million; the weighted average debt rate was 8.55% at year-end, versus 7.16% a year earlier.
Segments and material changes
- Sterigenics: Revenue of $667.1 million, up 6.5%; segment income of $362.2 million, up 6.8%. Pricing and foreign exchange more than offset modestly unfavorable volume and mix.
- Nordion: Revenue of $160.5 million, up 4.4%; segment income of $96.7 million, up 8.0%. Higher pricing and medical-use Co-60 volumes helped; industrial-use Co-60 volumes declined.
- Nelson Labs: Revenue of $221.7 million, down 0.8%; segment income of $69.1 million, down 10.9%. Unfavorable volume and mix and inflation weighed on results.
- Consolidated revenue and segment income increased, but higher service costs, including compensation and depreciation, compressed gross margin. Management attributed the rise in operating income partly to lower SG&A, including lower EO-litigation professional fees.
Cash, debt and liquidity
- Year-end cash and cash equivalents were $296.4 million, plus $5.2 million of restricted cash. Total cash including restricted cash was $301.7 million, down $94.6 million year over year.
- Principal debt outstanding was approximately $2.261 billion, all variable-rate debt; the balance-sheet carrying amount, net of discounts and issuance costs, was approximately $2.228 billion. Debt maturities are principally in 2026.
- The revolving credit facility had $423.8 million of commitments and $400.1 million available at year-end after $23.7 million of letters of credit; no revolving borrowings were outstanding. The company reported compliance with its debt covenants.
- Cash interest paid in 2023 was $173.8 million. Management estimates a 1 percentage-point increase in rates would add about $8.6 million in annual interest expense, after the disclosed hedges.
- Operating cash flow was negative largely because approximately $407.7 million was paid for the Illinois settlement. Management expects cash on hand, operating cash flow and available credit to meet foreseeable working-capital needs, debt service, capital expenditures and litigation costs for at least the next 12 months.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects 2024 capital expenditures to be similar to 2023, including about $40 million for environmental enhancements and $47 million for Co-60 development; it expects capex to decline gradually beginning in 2025.
- FY2023 included a $35 million charge for settlement of 79 Atlanta EO claims, paid in January 2024. The company says approximately 245 consolidated personal-injury claims and 365 consolidated property-devaluation claims related to Atlanta remain pending, along with New Mexico litigation and additional Willowbrook claims. It denies liability and says future EO losses cannot be reasonably estimated; future settlements are described as reasonably possible.
- The $408 million Willowbrook settlement was recognized as a charge in FY2022 and funded in 2023. The company reported an adverse Illinois jury verdict of $358.7 million in one 2022 trial, followed by a defense verdict in another; the settlement resolved more than 880 claims. Historical insurance limits applicable to the EO litigation have been exhausted, and current environmental liability insurance excludes EO claims. The company is pursuing additional insurance recoveries; an insurer has appealed a $110.2 million defense-cost judgment.
- Regulatory and environmental exposure is significant. Proposed and evolving EO emission and worker-protection requirements could require added operating costs and capital investment. Management expects 2024 environmental enhancements, but final requirements and their cost are uncertain.
- Co-60 supply depends on a limited number of reactors and counterparties. The company estimates about 20% of long-term supply will come from Russian reactors, with the share potentially rising to about 50% in some years; sanctions, logistics and licensing could disrupt shipments. No Russian-supply impact on 2023 supply or revenue was reported.
- The company also cites significant leverage, variable interest rates, inflation and supply costs, competition from alternative sterilization technologies, operational and regulatory risks, and ongoing securities litigation. It does not expect to pay common-stock dividends in the foreseeable future.
- Non-GAAP Adjusted Net Income and Adjusted EBITDA exclude, among other items, share-based compensation, depreciation or amortization, EO-litigation costs and settlement charges. They supplement, and should not replace, GAAP results.
Most important facts for investors to verify
- Progress, remaining claim counts, potential liabilities and insurance recoveries for EO litigation, particularly Atlanta and New Mexico; also review the possible effect of appellate bonds and debt-default provisions.
- Final EPA and state EO rules, facility compliance requirements, and actual environmental capital and operating costs.
- Co-60 supply continuity, Russian shipment licenses and logistics, and progress diversifying supply sources.
- Cash generation after settlement payments, interest expense and debt maturity/refinancing plans for 2026.
- Whether Nelson Labs can stabilize volumes and margins, and whether planned expansion spending produces expected returns.