Sotera Health Company — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited, with comparison to Q1 2022. Sotera provides sterilization, cobalt-60 supply, laboratory testing and advisory services through Sterigenics, Nordion and Nelson Labs.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $220.6 million | $236.8 million | Down 6.8% |
| Gross profit / margin | $111.5 million / 50.6% | $128.9 million / 54.4% | Margin down 3.8 percentage points |
| Operating income | $33.4 million | $53.5 million | Down 37.6% |
| Net income | $2.8 million | $30.6 million | Down 90.7% |
| Diluted EPS | $0.01 | $0.11 | Down $0.10 |
| Adjusted EBITDA | $98.5 million | $115.3 million | Down 14.6% |
| Operating cash flow | $33.9 million | $50.0 million | Down $16.1 million |
| Capital expenditures | $45.0 million | $35.5 million | Up $9.5 million |
Service revenue rose 4.0% to $214.5 million, while product revenue fell 80.1% to $6.1 million, mainly reflecting Nordion’s Co-60 harvest timing and product mix. Cost of service revenue increased 10.2%, including higher energy, depreciation and labor costs. Net interest expense increased to $28.9 million from $10.4 million; the weighted-average rate on outstanding debt was 7.85% at March 31, 2023, versus 3.25% a year earlier.
Liquidity and debt
- Cash and cash equivalents were $647.9 million at March 31, 2023; restricted cash was a further $12.2 million. Cash including restricted cash increased $263.9 million during the quarter, principally from new borrowing.
- Long-term debt had $2.264 billion of gross principal outstanding, with a $2.226 billion net carrying amount. The $500 million Term Loan B issued in February helped fund the Illinois EO settlement and repay $200 million drawn on the revolver.
- The amended revolving facility totals $423.8 million; there were no revolver borrowings at quarter-end, and $358.7 million was available after letters of credit. The debt facilities mature in 2026 and are secured by substantially all borrower and guarantor assets. The company reported covenant compliance.
- Operating cash flow was below capital expenditures in the quarter. Management said cash, operating cash flows and available credit were expected to cover working capital, debt service, capital spending and litigation costs for at least the next 12 months.
Material changes and segment results
- Sterigenics: Revenue increased 7.0% to $160.0 million and segment income rose 4.3% to $82.8 million, mainly on pricing and favorable volume/mix. Segment margin eased to 51.8% from 53.1% amid inflation and first-quarter staffing levels.
- Nordion: Revenue fell 74.9% to $8.6 million and segment income fell 91.9% to $1.5 million, primarily due to expected Co-60 harvest schedule timing and mix. Two customers represented 54.6% and 11.3% of segment external revenue in the quarter.
- Nelson Labs: Revenue decreased 2.3% to $52.0 million and segment income decreased 17.3% to $14.1 million; lower volume/mix outweighed pricing gains.
- Adjusted net income was $38.0 million, down 36.9%. These non-GAAP measures exclude, among other items, share-based compensation, amortization and EO-related costs; they should be considered alongside GAAP results.
Outlook, risks and unusual items
- Management expects Nordion Co-60 harvest schedules to remain uneven through 2023, while expecting Sterigenics and Nelson Labs’ financial contribution to increase for the rest of the year. No quantified revenue or earnings guidance is provided in the filing.
- The company entered Illinois EO settlement agreements on March 28, 2023 covering claims of 881 eligible claimants. On May 1, after quarter-end, it funded a $408 million settlement escrow. Completion remains conditional, including claimant participation, claim dismissals and court approval; the agreements do not resolve all EO claims.
- The $408 million Illinois settlement reserve was included in accrued liabilities at quarter-end. The settlement was financed in part by the new $500 million Term Loan B. The company denies liability. Related litigation continues in Georgia and New Mexico, including a New Mexico Attorney General case; potential losses in those matters are not estimable. EO litigation insurance limits were fully utilized by March 31, 2023.
- In April 2023, the EPA proposed stricter EO worker-safety and emissions requirements. Management said some proposed measures could require facility modifications and capital spending, and some proposals may be difficult to meet at existing facilities; rules remain subject to review and change.
- Other stated risks include variable-rate debt and higher interest costs, possible Co-60 supply disruption (including Russian sources), regulation, inflation, foreign exchange, and ongoing securities and environmental litigation. Management did not expect a material Co-60 supply or revenue impact for the remainder of 2023.
Important facts for investors to verify
- Progress toward satisfying the Illinois settlement conditions, final claimant participation, court approval and the effect of the $408 million escrow payment on post-quarter liquidity.
- Quarterly Co-60 harvest and delivery timing, customer concentration at Nordion, and whether the expected improvement at Sterigenics and Nelson Labs materializes.
- Interest expense, variable-rate exposure, hedge effectiveness and available revolver capacity following settlement funding.
- Developments in Georgia and New Mexico EO litigation, EPA rulemaking, and any resulting operating requirements or capital costs.
- Whether operating cash flow can support elevated capital expenditures and debt service while maintaining management’s stated liquidity expectations.