Sotera Health Company — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the same periods in 2020. Sotera provides sterilization, irradiation, laboratory testing and advisory services through Sterigenics, Nordion and Nelson Labs. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $226.2m | $200.0m | $690.2m | $601.3m |
| Gross profit / margin | $125.6m / 55.5% | $107.5m / 53.7% | $384.7m / 55.7% | $323.0m / 53.7% |
| Operating income / margin | $65.7m / 29.0% | $47.0m / 23.5% | $190.3m / 27.6% | $153.6m / 25.6% |
| Net income | $27.4m | $0.6m | $81.1m | $5.9m |
| Adjusted EBITDA (non-GAAP) | $116.7m | $100.5m | $356.6m | $306.8m |
| Net cash from operations | Not provided for quarter | Not provided for quarter | $215.2m | $98.7m |
Quarterly revenue increased 13.1%; nine-month revenue increased 14.8% (12.4% excluding foreign-exchange effects). Growth reflected sterilization volumes and pricing, higher Nordion Co-60 sales, acquisitions and currency effects. Product revenue grew faster than service revenue in Q3. Gross and operating margins improved in both comparisons. Net income also benefited from sharply lower interest expense; comparisons with 2020 are affected by the prior-year period’s near break-even results.
Segments and cash flow
- Sterigenics: Q3 revenue $145.3m, up 15.1%; segment income $79.3m, up 19.0%. Nine-month revenue was $421.6m, up 15.9%.
- Nordion: Q3 revenue $28.8m, up 41.9%; segment income $16.3m, up 59.2%, driven by Co-60 volume, pricing and currency. Management cautions that sales timing can vary substantially by quarter.
- Nelson Labs: Q3 revenue $52.1m, down 2.6%; segment income $21.0m, down 10.8%, as lower PPE-testing demand outweighed BioScience Labs contributions. Nine-month revenue rose 8.9%.
- Nine-month operating cash flow was $215.2m. Investing outflow was $87.6m, including $60.9m of capital expenditures; financing outflow was $115.5m. Operating cash flow less reported capital expenditures was $154.3m.
Debt, liquidity and significant developments
- At September 30, cash and cash equivalents were $114.9m, versus $102.4m at year-end 2020. Current assets were $337.3m and current liabilities $133.6m.
- Debt principal comprised a $1,763.1m term loan due 2026 and $0.45m other debt; the balance-sheet carrying amount was $1,742.6m. No revolver borrowings were outstanding. The $347.5m revolver had $279.9m available after $67.6m of letters of credit.
- In January, the company repriced its term loan, lowering the LIBOR spread from 4.50% to 2.75% and the floor from 1.00% to 0.50%. Management estimated approximately $40m annual cash-interest savings based on the balance at the amendment date. In August, it redeemed $100m of First Lien Notes, with a $3m premium, and estimated approximately $7m annual interest savings. Nine-month interest expense fell to $58.6m from $167.1m; the 2021 period also included $20.7m of debt-extinguishment losses.
- Capital expenditures rose to $60.9m from $33.6m for the first nine months, reflecting capacity expansion, facility enhancements, cobalt development and other investments. Management said cash, operating cash flows and available credit were expected to cover operating needs, planned capital expenditures, litigation costs and debt service for at least the next 12 months.
- During 2021, Sotera acquired BioScience Labs for approximately $13.5m and bought remaining ownership interests in Nelson Labs Fairfield and two China subsidiaries. After quarter-end, in November, it acquired Regulatory Compliance Associates for approximately $31m.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or other numerical forecast. Management described continued capacity expansion, organic growth and selective acquisitions as priorities; the stated liquidity outlook covers at least the next 12 months.
- Ethylene oxide litigation is a significant uncertainty. The filing reports approximately 770 plaintiffs in Illinois, 41 personal-injury plaintiffs in Georgia, and a New Mexico Attorney General action. A preliminary injunction in New Mexico prohibits uncontrolled EO emissions but does not require facility closure. The company reported no reserve because loss was not considered probable or reasonably estimable; it warned adverse outcomes could materially affect results.
- Insurance for alleged environmental liabilities was limited: the Illinois occurrence limit was fully used, and $2.2m of the remaining $10m aggregate limit for Georgia and New Mexico had been used by September 30. Future EO claims are excluded from coverage.
- In September, an appellate court overturned Nordion’s favorable $39.8m judgment against FM Global and denied coverage; Nordion sought leave to appeal to Canada’s Supreme Court in October.
- Other risks include EO and cobalt-60 supply and safety, regulatory and environmental requirements, customer concentration in Nordion, COVID-19 effects, foreign-exchange and variable-rate debt exposure, and substantial leverage. Q3 comprehensive loss of $1.0m, despite net income, primarily reflected $29.9m of foreign-currency translation losses.
- Reported results include $9.4m of Q3 and $33.5m of nine-month professional costs relating to EO facilities, as well as acquisition, debt-refinancing and share-based compensation items. Adjusted EBITDA and Adjusted Net Income are non-GAAP measures; the company notes they exclude recurring or potentially continuing costs and should not replace GAAP measures.
Most important facts for investors to verify
- Progress, timing and potential financial consequences of EO-related litigation, injunction compliance, and the remaining insurance coverage.
- Term-loan pricing, floating-rate exposure, revolver availability and actual realization of estimated interest savings.
- Whether revenue and margin growth persist, particularly given volatile Nordion shipment timing and weaker Q3 Nelson Labs results.
- Returns from elevated capital spending and recent acquisitions, and the funding needs associated with planned expansion and further transactions.
- Cash conversion, tax payments and the quality of non-GAAP earnings adjustments relative to GAAP income and operating cash flow.