Sotera Health Company — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Sotera provides sterilization services, cobalt-60 products, laboratory testing, and advisory services through Sterigenics, Nordion, and Nelson Labs. Unless stated otherwise, amounts are U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Revenue | $248.7 million | $226.2 million | $752.1 million | $690.2 million |
| Gross profit / margin | $136.0 million / 54.7% | $125.6 million / 55.5% | $415.3 million / 55.2% | $384.7 million / 55.7% |
| Operating income / margin | $63.2 million / 25.4% | $65.7 million / 29.0% | $188.2 million / 25.0% | $190.3 million / 27.6% |
| Net income | $25.1 million | $27.4 million | $86.1 million | $81.1 million |
| Diluted EPS | $0.09 | $0.10 | $0.31 | $0.29 |
| Adjusted EBITDA (non-GAAP) | $125.2 million | $116.7 million | $376.6 million | $356.6 million |
| Operating cash flow | Not provided separately | Not provided separately | $176.0 million | $215.2 million |
| Capital expenditures | Not provided separately | Not provided separately | $110.6 million | $60.9 million |
Q3 revenue rose 10.0% year over year (13.2% excluding currency effects), while net income declined 8.6%. For the nine-month period, revenue rose 9.0% (11.3% excluding currency effects) and net income rose 6.2%. Adjusted EBITDA increased 7.3% in Q3 and 5.6% year to date; these are non-GAAP measures and exclude, among other items, EO-litigation costs, share-based compensation, and amortization.
- Cash and liquidity: Cash and cash equivalents were $164.0 million at September 30, up from $106.9 million at year-end 2021; cash including restricted cash was $165.0 million. Current assets were $420.7 million and current liabilities $140.0 million. The company reported $279.9 million available on its revolving facility after $67.6 million of letters of credit.
- Debt: Term-loan principal was $1.763 billion, due in 2026; no revolving loans were outstanding. Long-term debt, net of issuance costs and discounts, was $1.747 billion. The term loan is variable-rate; its weighted-average rate was 4.96% in Q3 versus 3.25% a year earlier. The company estimated that a 1 percentage-point rate increase would add about $7.6 million to 2023 interest expense after interest-rate caps.
- Cash generation and investment: Nine-month operating cash flow fell $39.2 million, mainly because cash income-tax and interest payments increased. Capital expenditures rose $49.7 million year over year, reflecting facility, capacity, and cobalt-supply investments.
Segments and material changes
- Sterigenics: Q3 revenue increased 8.5% to $157.7 million and segment income increased 7.9% to $85.6 million, supported by price and volume. Nine-month revenue rose 10.3% to $465.0 million.
- Nordion: Q3 revenue increased 21.9% to $35.1 million and segment income rose 24.3% to $20.3 million, driven mainly by volume and pricing. Nine-month revenue rose 15.2% to $119.6 million.
- Nelson Labs: Q3 revenue grew 7.3% to $55.9 million, but segment income declined 8.2% to $19.3 million; staffing, unfavorable mix, currency, and acquisition-related margin dilution weighed on results. Nine-month revenue grew 1.7% to $167.6 million, while segment income declined 15.5% to $57.4 million, reflecting lower pandemic-related testing and pressure from labor and supply costs.
- Consolidated operating income declined slightly in both comparison periods despite revenue growth. Higher service costs, inflation in labor and energy, and higher SG&A—including EO-related professional fees—compressed operating margins. Q3 interest expense increased 29.1% as rates rose; nine-month reported interest expense declined 18.3%, aided by interest-rate-cap valuation and settlement effects.
Outlook, risks, contingencies, and unusual items
- Management reported sustained demand for Sterigenics and Nordion. Nelson Labs grew in Q3, but slower-than-expected growth in some testing categories and customer delays affected performance. The filing provides no specific numerical revenue or earnings guidance.
- Management said it expected no material 2022 impact to cobalt-60 supply or revenue from potential Russian supply disruption, while continuing to monitor the risk. Inflation, energy and labor costs, foreign-exchange movements, supply-chain disruption, and rising variable-rate interest costs remain relevant pressures.
- EO litigation is a major contingent liquidity risk. On September 19, 2022, an Illinois jury awarded $358.7 million against two subsidiaries, including $320.0 million punitive damages, $36.1 million compensatory damages, and $2.6 million prejudgment interest. The company filed post-trial motions on October 26 seeking judgment in its favor, a new trial, or reduced damages, and intends to appeal as appropriate. It said payment is expected to be stayed during post-trial and appeal proceedings; the duration and outcome are uncertain.
- The company recorded no reserve for the first Illinois case, stating that a loss was not probable; it disclosed a possible range of $0 to $358.7 million plus post-judgment interest. A bond or other security may be required to stay enforcement during appeal, with amount and funding uncertain. An unstayed, enforceable judgment above $100 million could trigger a credit-agreement default under specified conditions. The company reported covenant compliance at quarter-end.
- The first trial’s verdict is not considered predictive by management, but hundreds of Illinois and Georgia EO-related claims remain, alongside New Mexico proceedings. A New Mexico preliminary injunction prohibits uncontrolled EO releases at the facility. The company also reports Georgia facility-operations litigation.
- EO-related professional-service costs were $14.5 million in Q3 and $50.2 million for the first nine months. Of a $10.0 million remaining insurance limit for Georgia and New Mexico EO-related occurrences, approximately $7.5 million had been used by quarter-end; future environmental liability insurance excludes EO claims.
- The company impaired its unconsolidated joint-venture investment by $9.6 million in the first half of 2022 after the project was discontinued. Nine-month comprehensive income was $5.7 million, affected by a $100.5 million foreign-currency translation loss, partly offset by gains on interest-rate derivatives.
Investor verification priorities
- Track post-trial rulings, appeals, subsequent Illinois trial outcomes, and any bond or other collateral required to stay enforcement of EO judgments.
- Assess the potential cash and financing consequences of litigation against cash, revolver availability, debt covenants, and substantial term-loan leverage.
- Monitor Nelson Labs testing volumes, pandemic-related revenue comparisons, staffing and cost pressures, and whether pricing offsets inflation.
- Review interest-rate exposure and hedge coverage as benchmark rates and the LIBOR-to-SOFR transition affect borrowing costs.
- Distinguish GAAP earnings and cash flow from Adjusted EBITDA and Adjusted Net Income, which exclude recurring and litigation-related costs; also track the elevated capital-spending program and its returns.