Sotera Health Company — Q3 2023 Form 10-Q
Business context and reporting period
Global provider of sterilization services, cobalt-60 products and laboratory testing/advisory services through Sterigenics, Nordion and Nelson Labs. This filing covers the quarter and nine months ended September 30, 2023; financial figures below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $263.2 | $248.7 | $739.0 | $752.1 |
| Gross profit / margin | $146.0 / 55.5% | $136.0 / 54.7% | $397.1 / 53.7% | $415.3 / 55.2% |
| Operating income / margin | $76.1 / 28.9% | $63.2 / 25.4% | $172.7 / 23.4% | $188.2 / 25.0% |
| Net income (loss) | $(13.7) | $25.1 | $12.7 | $86.1 |
| Adjusted EBITDA | $134.3 | $125.2 | $361.3 | $376.6 |
| Adjusted Net Income | $58.6 | $64.5 | $156.0 | $200.6 |
| Operating cash flow | Not provided separately | Not provided separately | $(260.9) | $176.0 |
| Capital expenditures | Not provided separately | Not provided separately | $150.1 | $110.6 |
Q3 revenue rose 5.8% year over year, led by pricing and higher Nordion sales; net loss included a $35.0 million Georgia EO litigation settlement charge and higher interest expense. Nine-month revenue fell 1.7%, operating income fell 8.2%, and net income declined 85.3%. The year-to-date comparison was weighed down by lower Nordion product volumes and weaker volume/mix at Nelson Labs and Sterigenics, as well as sharply higher interest costs.
Q3 segment trends were mixed: Sterigenics revenue increased 6.7% and segment income 8.9%; Nordion revenue increased 14.3% and segment income 18.5%; Nelson Labs revenue declined 2.1% and segment income 11.2%. For the nine months, Sterigenics revenue grew 6.4%, while Nordion revenue fell 32.6% and Nelson Labs revenue fell 2.4%.
Liquidity, debt and cash flow
- At September 30, cash and cash equivalents were $245.0 million, plus $7.6 million of restricted cash. Total debt carrying value was approximately $2.228 billion; stated principal was $2.262 billion. Net debt based on carrying value and cash was approximately $1.983 billion.
- The revolving facility had no borrowings outstanding; $399.8 million remained available after $24.0 million of letters of credit. Total commitments were $423.8 million.
- Nine-month operating cash use of $260.9 million principally reflected release of approximately $408 million for the Illinois Willowbrook settlement. Investing cash use was $150.1 million; financing provided $269.8 million, including $500 million of new Term Loan B proceeds and repayment of $200 million under the revolver.
- Debt is principally variable-rate and matures in 2026. Reported weighted-average rates on outstanding debt were 8.38% at September 30, 2023 versus 5.87% a year earlier. Interest-rate caps and a swap partially hedge rate exposure. The company reported compliance with debt covenants.
Outlook, commentary, risks and unusual items
- No specific revenue, earnings or cash-flow guidance is provided. Management expects cash on hand, operating cash flows and credit-facility availability to cover foreseeable working-capital needs, debt service, capital spending and litigation costs for at least the next 12 months.
- Management cited continued investment in sterilization capacity, Co-60 development and Nelson Labs capabilities. Capital expenditures increased $39.5 million year over year for the first nine months.
- The $408 million Willowbrook settlement was funded and substantially distributed in 2023, resolving claims of 879 participating claimants; three nonparticipating claimants’ cases remain. The company denies liability. Additional EO litigation remains pending, and future losses cannot be reasonably estimated from the filing.
- On October 16, 2023, the company entered a term sheet for a proposed $35 million settlement of 79 Georgia claims, subject to participation and other conditions. The amount was recorded as a Q3 charge. Other Georgia claims remain; settlement completion is not assured.
- In New Mexico, a court granted summary judgment for the company on several claims, but the State’s reconsideration motion remains pending; a separate wrongful-death suit and jurisdiction motions also remain pending. Securities litigation motions to dismiss are pending.
- Insurance recovery for EO litigation is uncertain. Disclosed historical coverage limits were exhausted; the company is pursuing additional coverage, including through pending insurance litigation.
- EPA proposals for stricter EO emissions and exposure requirements may require facility changes and higher capital and operating costs. The company stated that some proposed requirements could be difficult or unachievable at existing facilities if adopted as proposed. Final rules were expected in 2024.
- Other disclosed exposures include Co-60 supply disruption risk, including Russian-source supply; variable interest rates, inflation, regulatory compliance, operating hazards and customer concentration. Four Nordion customers each represented at least 10% of segment revenue in Q3.
Most important facts for investors to verify
- Progress and final participation conditions for the $35 million Georgia settlement, and the status and potential costs of remaining EO claims.
- Whether the company obtains insurance recoveries for legal defense and settlement costs, and how pending coverage appeals affect recovery prospects.
- Final EPA requirements, implementation deadlines and expected compliance spending for EO facilities.
- Nordion shipment timing, customer concentration and Co-60 availability; whether the year-to-date volume decline reverses.
- Ability to generate operating cash flow while funding elevated capital expenditures and servicing roughly $2.26 billion of principal at high variable rates.
- How adjusted results compare with GAAP results: Adjusted EBITDA excludes, among other items, EO litigation costs, interest, depreciation and share-based compensation.