Executive Summary / Key Takeaways

• Sotera Health (NASDAQ:SHC) demonstrates robust resilience and consistent growth, underpinned by its mission-critical sterilization and lab testing services essential for the global healthcare industry. The company has achieved 19 consecutive years of annual revenue growth, navigating diverse economic cycles.
• Strategic vertical integration, particularly between Sterigenics and Nordion, provides a unique competitive advantage, ensuring a reliable supply of critical Cobalt-60 and offering comprehensive end-to-end solutions to highly regulated medical device and pharmaceutical customers.
• Strong financial performance in Q3 2025, with revenue up 9.1% and Adjusted EBITDA up 12.2% year-over-year, highlights operational excellence and margin expansion across segments, especially in Nelson Labs due to optimization and core lab testing growth.
• Management's raised 2025 Adjusted EBITDA outlook (6.75%-7.75% constant currency growth) and reduced capital expenditure guidance ($125M-$135M) underscore disciplined capital allocation and a clear path to achieving $500M-$600M in cumulative free cash flow from 2025-2027.
• While Ethylene Oxide (EO) tort litigation remains a notable risk, recent favorable legal rulings in Georgia and settlements in Illinois, coupled with the company's commitment to scientific defense, provide a clearer, though still uncertain, path forward.

Safeguarding Global Health: A Foundation of Indispensable Services

Sotera Health stands as a cornerstone of the global healthcare industry, providing mission-critical end-to-end sterilization solutions, lab testing, and advisory services. Its overarching mission, "Safeguarding Global Health," is not merely a slogan but a reflection of its indispensable role in ensuring the safety and efficacy of medical, pharmaceutical, and food products worldwide. The company's services are deeply embedded in its customers' manufacturing processes and supply chains, often mandated by stringent government regulations. This foundational demand has enabled Sotera Health to achieve an impressive 19 consecutive years of annual revenue growth, a testament to its resilient business model that has weathered economic downturns like the Great Recession and the COVID-19 pandemic.

The company's strategic strength is rooted in its three core segments: Sterigenics, Nordion, and Nelson Labs. Sterigenics offers outsourced terminal sterilization using gamma irradiation, ethylene oxide (EO) processing, and E-beam irradiation. Nordion, a leading global provider of Cobalt-60 (Co-60), supplies the critical isotope for sterilization and cancer treatment, also providing gamma irradiation systems. Nelson Labs complements these with outsourced microbiological and analytical chemistry testing and advisory services. This combination makes Sotera Health the only vertically integrated global gamma sterilization provider, a key differentiator that offers enhanced insights and superior service capabilities to its customers.

Technological Edge and Strategic Investments

Sotera Health's competitive moat is significantly fortified by its differentiated technology and strategic investments. The vertical integration of Sterigenics and Nordion is a prime example, ensuring a secure and reliable supply chain for gamma sterilization. A monumental achievement in September 2025 was Nordion's securing of a 25-year renewal of its Class 1B operating license from the Canadian Nuclear Safety Commission (CNSC), the longest such license ever granted. This milestone underscores Nordion's operational excellence and safety culture, guaranteeing the global supply of critical Co-60 for decades to come, supporting both sterilization processes and life-saving radiotherapeutic treatments.

In EO processing, the company's technology is vital for sterilizing a vast array of medical devices and pharmaceuticals. Sotera Health maintains confidence in the safety of its operations, asserting that emissions from its facilities do not cause cancer at the levels involved. This stance is central to its defense in ongoing litigation. The company is also actively investing in its U.S. EO facility enhancements under NESHAP regulations, which, while requiring capital, are expected to facilitate optimal installation of emissions controls and could lead to gradual, incremental pricing improvements over time.

Nelson Labs' expertise in microbiological and analytical chemistry testing provides critical support for FDA approvals, including biocompatibility, packaging validation, and specialized testing like extractable leachable analysis for bioprocessing components. This regulatory-driven demand, coupled with the team's lab optimization and labor productivity initiatives, has been a key driver of margin expansion. The company's integrated expertise was exemplified by its role in securing FDA clearance for the first bionic pancreas, where Nelson Labs provided testing and regulatory guidance, and Sterigenics performed the mandated sterilization. This end-to-end solution highlights the value proposition of Sotera Health's combined offerings.

Further bolstering its long-term supply and capacity, Sotera Health initiated the installation of cobalt into a Darlington reactor in 2024, with the first Co-60 harvest expected in 2028. This program is progressing well, with capital deployment proving lighter than initially expected. Additionally, the company has approved an incremental capacity expansion program for Sterigenics in the U.S., slated to come online in late 2027, demonstrating a responsive approach to customer demand and market opportunities.

Competitive Landscape and Market Positioning

Sotera Health operates in a competitive yet highly specialized market, where its focused strategy and integrated service model provide distinct advantages. Key direct competitors include Steris Corporation , Thermo Fisher Scientific , Danaher Corporation , and Ecolab (ECL), all of whom have overlapping operations in sterilization, lab testing, or related healthcare and life sciences services.

Sotera Health's vertically integrated gamma sterilization offering, combining Sterigenics and Nordion, is a unique competitive moat that no other single competitor fully replicates. This integration provides greater control over the supply chain for a critical sterilization modality. In sterilization services, Sotera Health competes directly with Steris (STE), with its specialized focus on biopharmaceuticals and high-compliance industries contrasting with Steris's broader, more diversified infection control portfolio. Sotera Health's proprietary sterilization technology offers significantly higher reliability in pathogen elimination, translating to stronger customer loyalty and recurring revenue from long-term contracts, which can lead to superior margins through efficient operations and pricing power in regulated markets.

In lab testing, Nelson Labs competes with giants like Thermo Fisher Scientific (TMO) and Danaher Corporation (DHR). While these larger players offer a wider array of instruments and diagnostics, Nelson Labs differentiates itself through highly specialized microbiological and analytical chemistry testing, coupled with tailored advisory services focused on regulatory compliance. This expertise is particularly valuable in high-stakes environments where precision and adherence to complex regulations are paramount. The company's strong relationships with shared customers—approximately 70% of Sterigenics and Nelson Labs' revenue comes from joint clients—further enhances cross-selling opportunities and customer stickiness, providing a robust defense against broader competitors.

Financial Performance and Outlook

Sotera Health delivered a strong financial performance in the third quarter of 2025, building on a solid year-to-date trend. Total net revenues for Q3 2025 increased by 9.1% to $311.3 million, or 8.0% on a constant currency basis, compared to the same period in 2024. This growth was driven by increases in volume and mix across Sterigenics and Nordion, growth in core lab testing services at Nelson Labs, and favorable pricing. Adjusted EBITDA saw an even stronger increase of 12.2% to $164.2 million, or 11.2% on a constant currency basis, resulting in an Adjusted EBITDA margin of 52.7%, a 147 basis point expansion year-over-year. Net income for the quarter was $48.4 million, a significant increase from $17.0 million in Q3 2024, leading to an Adjusted EPS of $0.26, up $0.09.

Segment-wise, Sterigenics continued its robust performance, with Q3 2025 net revenues of $192.8 million, up 9.8% year-over-year, driven by a 4.6% increase in volume and mix and 3.8% from favorable pricing. Its segment income margin expanded by 90 basis points to 55.6%. Nordion's revenue surged by 22.4% to $62.8 million, primarily due to the timing of reactor harvest schedules, with segment income growing 19.9%. Nelson Labs, despite a 5.0% decline in revenue to $55.7 million due to a decrease in Expert Advisory Services, demonstrated strong operational improvements, with segment income rising 1.9% and margins expanding by 229 basis points to 34.1%. This marks the fifth consecutive quarter of year-over-year margin expansion for Nelson Labs, driven by lab optimization and favorable pricing.

Looking ahead, Sotera Health has reaffirmed its full-year 2025 constant currency revenue growth outlook of 4.5% to 6.0%, anticipating it will land near the midpoint. The company raised its constant currency Adjusted EBITDA growth outlook to 6.75% to 7.75%, up from the prior range of 6.0% to 7.5%. This improved profitability guidance is supported by an expected effective tax rate on adjusted net income of 29% to 31%, benefiting from recent U.S. tax law changes. Adjusted EPS is now projected to be in the range of $0.81 to $0.86, an increase from the previous outlook.

The company's liquidity remains strong, with over $890 million available as of September 30, 2025, including nearly $300 million in unrestricted cash and almost $600 million in revolving credit capacity. Sotera Health has made significant progress in deleveraging, with its net leverage ratio improving to 3.3x at the end of Q3 2025, down from 3.7x at the end of 2024, moving closer to its long-term target of 2x to 3x. Strategic actions in Q3 2025, including a $75 million debt paydown and repricing of the Term Loan, are expected to generate approximately $13 million in annual interest savings. Capital expenditures for 2025 are now expected to be between $125 million and $135 million, a reduction from the prior outlook, driven by project timing and cost savings. Despite this shift, the company remains on track to achieve its commitment of $500 million to $600 million in cumulative free cash flow from 2025 through 2027.

Risks and Challenges

Despite its strong market position and operational performance, Sotera Health faces several key risks. The most prominent is the ongoing Ethylene Oxide tort litigation across multiple U.S. states. While the company has achieved settlements for 97 claims in Illinois in April 2025 (with a $30.90 million payment completed in September 2025) and an additional 129 claims in July 2025, litigation continues. In Georgia, the Court of Appeals vacated a prior Phase 1 ruling, instructing the trial court to apply a more rigorous standard for general causation, and the trial court dismissed three bellwether cases in Phase 2 due to a lack of reliable expert testimony. These developments align with the company's long-standing position that scientific evidence refutes the plaintiffs' claims. However, the outcomes of legal proceedings are inherently uncertain, and future settlements or judgments could materially impact financial condition.

The company's insurance coverage for environmental liabilities has been fully utilized, and future policies exclude EO claims, necessitating the pursuit of additional coverage for legal expenses. Securities litigation also remains, with a stockholder class action dismissed but appealed, and a derivative lawsuit stayed. Other risks include potential disruptions in the supply of critical materials like EO and Co-60, fluctuations in foreign currency exchange rates, and evolving environmental regulations. While tariffs are currently not expected to have a material impact, particularly with Co-60 being exempt under USMCA, this remains a factor to monitor.

Conclusion

Sotera Health's investment thesis is firmly rooted in its essential role within the global healthcare ecosystem, its robust operational execution, and its strategic advantages as a vertically integrated sterilization and specialized lab testing provider. The company's consistent track record of revenue growth, even through challenging economic periods, underscores the resilience of its business model. Recent financial results, marked by strong top-line growth, significant Adjusted EBITDA expansion, and improved margins, demonstrate effective management and a clear path to enhanced profitability and free cash flow generation.

The company's technological leadership, exemplified by Nordion's long-term license renewal and ongoing investments in EO facility enhancements and cobalt development, reinforces its competitive moat and ensures long-term supply security. While the ongoing EO litigation presents a material risk, recent legal developments suggest a more favorable trajectory for the company's defense, though continued vigilance is warranted. Sotera Health's disciplined capital allocation and commitment to deleveraging further strengthen its financial foundation. For discerning investors, Sotera Health represents a compelling opportunity in a critical sector, poised for sustainable growth driven by its indispensable services and strategic foresight.