Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.76M
2: EX-10.2 Material Contract HTML 35K
3: EX-10.3 Material Contract HTML 67K
4: EX-31.1 Certification -- §302 - SOA'02 HTML 27K
5: EX-31.2 Certification -- §302 - SOA'02 HTML 27K
6: EX-32.1 Certification -- §906 - SOA'02 HTML 25K
12: R1 Cover HTML 77K
13: R2 Consolidated Balance Sheets HTML 160K
14: R3 Consolidated Balance Sheets (Parenthetical) HTML 41K
15: R4 Consolidated Statements of Operations and HTML 126K
Comprehensive Income (Loss)
16: R5 Consolidated Statements of Operations and HTML 28K
Comprehensive Income (Loss) (Parenthetical)
17: R6 Consolidated Statements of Cash Flows HTML 129K
18: R7 Consolidated Statements of Equity HTML 81K
19: R8 Basis of Presentation HTML 28K
20: R9 Recent Accounting Standards HTML 35K
21: R10 Revenue Recognition HTML 72K
22: R11 Acquisitions HTML 26K
23: R12 Inventories HTML 33K
24: R13 Prepaid Expenses and Other Current Assets HTML 44K
25: R14 Goodwill and Other Intangible Assets HTML 77K
26: R15 Accrued Liabilities HTML 39K
27: R16 Long-Term Debt HTML 78K
28: R17 Income Taxes HTML 29K
29: R18 Employee Benefits HTML 57K
30: R19 Other Comprehensive Income (Loss) HTML 86K
31: R20 Share-Based Compensation HTML 53K
32: R21 Earnings Per Share HTML 60K
33: R22 Commitments and Contingencies HTML 50K
34: R23 Financial Instruments and Financial Risk HTML 136K
35: R24 Segment Information HTML 109K
36: R25 Pay vs Performance Disclosure HTML 35K
37: R26 Insider Trading Arrangements HTML 29K
38: R27 Basis of Presentation (Policies) HTML 36K
39: R28 Revenue Recognition (Tables) HTML 68K
40: R29 Inventories (Tables) HTML 34K
41: R30 Prepaid Expenses and Other Current Assets (Tables) HTML 44K
42: R31 Goodwill and Other Intangible Assets (Tables) HTML 120K
43: R32 Accrued Liabilities (Tables) HTML 39K
44: R33 Long-Term Debt (Tables) HTML 69K
45: R34 Employee Benefits (Tables) HTML 50K
46: R35 Other Comprehensive Income (Loss) (Tables) HTML 86K
47: R36 Share-Based Compensation (Tables) HTML 51K
48: R37 Earnings Per Share (Tables) HTML 61K
49: R38 Financial Instruments and Financial Risk (Tables) HTML 133K
50: R39 Segment Information (Tables) HTML 103K
51: R40 Basis of Presentation (Details) HTML 43K
52: R41 Revenue Recognition (Details) HTML 56K
53: R42 Acquisitions (Details) HTML 38K
54: R43 Inventories (Details) HTML 35K
55: R44 Prepaid Expenses and Other Current Assets HTML 56K
(Details)
56: R45 Goodwill and Other Intangible Assets - Schedule of HTML 36K
Goodwill (Details)
57: R46 Goodwill and Other Intangible Assets - Schedule of HTML 55K
Acquired Finite-Lived and Indefinite-Lived
Intangible Assets (Details)
58: R47 Goodwill and Other Intangible Assets - Narrative HTML 36K
(Details)
59: R48 Goodwill and Other Intangible Assets - Schedule of HTML 38K
Finite-Lived Intangible Assets, Future
Amortization Expense (Details)
60: R49 Accrued Liabilities (Details) HTML 46K
61: R50 Long-Term Debt - Schedule of Long-term Debt HTML 73K
Instruments (Details)
62: R51 Long-Term Debt - Senior Secured Credit Facilities HTML 107K
(Narrative) (Details)
63: R52 Long-Term Debt - Schedule of Maturities of HTML 41K
Long-term Debt (Details)
64: R53 Income Taxes (Details) HTML 25K
65: R54 Employee Benefits - Schedule of Net Benefit Costs HTML 45K
(Details)
66: R55 Employee Benefits - Narrative (Details) HTML 37K
67: R56 Other Comprehensive Income (Loss) (Details) HTML 59K
68: R57 Share-Based Compensation - Narrative (Details) HTML 76K
69: R58 Share-Based Compensation - Schedule of Nonvested HTML 36K
Restricted Stock Units Activity (Details)
70: R59 Share-Based Compensation - Schedule of Stock HTML 50K
Option Activity (Details)
71: R60 Share-Based Compensation - Schedule of Restricted HTML 47K
Stock Activity (Details)
72: R61 Earnings Per Share (Details) HTML 92K
73: R62 Commitments and Contingencies (Details) HTML 94K
74: R63 Financial Instruments and Financial Risk - HTML 55K
Narrative (Details)
75: R64 Financial Instruments and Financial Risk - HTML 51K
Schedule of Derivative Instruments (Details)
76: R65 Financial Instruments and Financial Risk - HTML 43K
Schedule of Derivative Instruments, Gain (Loss)
(Details)
77: R66 Financial Instruments and Financial Risk - HTML 96K
Schedule of Fair Value, Assets and Liabilities
Measured on Recurring Basis (Details)
78: R67 Segment Information - Narrative (Details) HTML 45K
79: R68 Segment Information - Schedule of Segment HTML 50K
Reporting Information, by Segment (Details)
80: R69 Segment Information - Schedule of Reconciliation HTML 88K
of Operating Profit (Loss) from Segments to
Consolidated (Details)
83: XML IDEA XML File -- Filing Summary XML 152K
81: XML XBRL Instance -- shc-20230630_htm XML 2.55M
82: EXCEL IDEA Workbook of Financial Report Info XLSX 164K
8: EX-101.CAL XBRL Calculations -- shc-20230630_cal XML 239K
9: EX-101.DEF XBRL Definitions -- shc-20230630_def XML 733K
10: EX-101.LAB XBRL Labels -- shc-20230630_lab XML 1.94M
11: EX-101.PRE XBRL Presentations -- shc-20230630_pre XML 1.19M
7: EX-101.SCH XBRL Schema -- shc-20230630 XSD 166K
84: JSON XBRL Instance as JSON Data -- MetaLinks 590± 851K
85: ZIP XBRL Zipped Folder -- 0001822479-23-000051-xbrl Zip 643K
(Exact name of registrant as specified in its charter)
iDelaware
i47-3531161
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i9100 South Hills Blvd, iSuite
300
iBroadview Heights, iOhio
i44147
(Address
of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code
(i440)
i262-1410
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, $0.01 par value per share
iSHC
iThe
Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒iYes☐
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒iYes☐ No
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes i☒ No
As
of July 27, 2023, there were i282,615,723 shares of the registrant’s common stock, $0.01 par value per share, outstanding.
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often characterized by the use of words such as “believes,”“estimates,”“expects,”“projects,”“may,”“intends,”“plans” or “anticipates,” or by discussions of strategy, plans or intentions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance, achievements, or industry results, to differ materially from historical results or any future results, performance or achievements expressed, suggested or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to:
•any
disruption in the availability or supply of, or increases in the price of, ethylene oxide (“EO”), Cobalt-60 (“Co-60”) or our other direct materials, services and supplies, including as a result of geopolitical instability and sanctions arising from United States, Canadian, United Kingdom or European Union relations with Russia;
•foreign currency exchange rates and changes in those rates;
•changes in environmental, health and safety regulations or preferences, and general economic, social and business conditions;
•health and safety risks associated with the use, storage, transportation and disposal of potentially hazardous materials such as EO and Co-60;
•the impact and outcome of current
and future legal proceedings and liability claims, including litigation related to purported exposure to emissions of EO from our facilities in Illinois, Georgia and New Mexico and the possibility that other claims will be made in the future relating to these or other facilities;
•allegations of our failure to properly perform services and potential product liability claims, recalls, penalties and reputational harm;
•compliance with the extensive regulatory requirements to which we are subject, the related costs, and any failures to receive or maintain, or delays in receiving, required clearance or approvals;
•adverse changes in industry trends;
•competition we face;
•market
changes, including inflationary trends, that impact our long-term supply contracts with variable price clauses and increase our cost of revenues;
•business continuity hazards, including supply chain disruptions and other risks associated with our operations;
•the risks of doing business internationally, including global and regional economic and political instability and compliance with numerous laws and regulations in multiple jurisdictions;
•our ability to increase capacity at existing facilities, build new facilities in a timely and cost-effective manner and renew leases for our leased facilities;
•our
ability to attract and retain qualified employees;
•severe health events, such as the COVID-19 pandemic, or environmental events;
•cyber security breaches, unauthorized data disclosures, and our dependence on information technology systems;
•any inability to pursue strategic transactions or find suitable acquisition targets, or our failure to integrate strategic acquisitions successfully into our business;
•our ability to maintain effective internal controls over financial reporting;
•our reliance on intellectual property to maintain our competitive position and the risk of claims from third parties that we infringe or misappropriate
their intellectual property rights;
•our ability to comply with rapidly evolving data privacy and security laws and regulations and any ineffective compliance efforts with such laws and regulations;
•our ability to maintain profitability in the future;
•impairment charges on our goodwill and other intangible assets with indefinite lives, as well as other long-lived assets and intangible assets with definite lives;
•the effects of unionization efforts and labor regulations in certain countries in which we operate;
•adverse changes to our tax positions in U.S. or non-U.S. jurisdictions, the interpretation and application of recent
U.S. tax legislation or other changes in U.S. or non-U.S. taxation of our operations; and
•our significant leverage and how this significant leverage could adversely affect our ability to raise additional capital, limit our ability to react to changes in the economy or our industry, limit our flexibility in operating our business through restrictions contained in our debt agreements and/or prevent us from meeting our obligations under our existing and future indebtedness.
These statements are based on current plans, estimates and projections, and therefore you should not place undue reliance
on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them publicly in light of new information or future events, except as required by law. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved.
You should carefully consider the above factors, as well as the factors discussed elsewhere in this Quarterly Report on Form 10-Q, including under Part II, Item 1A, “Risk Factors,” as well as Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”). If any of these trends, risks or uncertainties actually occur or continue, our business, financial condition or operating results could
be materially adversely affected, the trading prices of our securities could decline and you could lose all or part of your investment. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.
Unless expressly indicated or the context requires otherwise, the terms “Sotera Health,”“Company,”“we,”“us,” and “our” in this document refer to Sotera Health Company, a Delaware corporation, and, where appropriate, its subsidiaries on a consolidated basis.
iPrinciples of Consolidation – Sotera Health Company (also referred to herein as the “Company,”“we,”“our,”“us” or “its”), is a leading global provider of mission-critical end-to-end sterilization solutions, lab testing and advisory services for the healthcare industry with operations primarily in the Americas, Europe and Asia.
We operate and report in iithree/
segments, Sterigenics, Nordion and Nelson Labs. We describe our reportable segments in Note 17, “Segment Information”. All significant intercompany balances and transactions have been eliminated in consolidation.
In July 2020, we acquired a i60% equity ownership interest in a joint venture to construct an E-beam facility in Alberta, Canada in connection with our acquisition of Iotron Industries Canada, Inc. (“Iotron”). Our equity ownership interest in the joint venture was determined to be an investment in a variable interest entity (“VIE”). The investment
was not consolidated as the Company concluded that it was not the primary beneficiary of the VIE. The Company accounted for the joint venture using the equity method.
During the year ended December 31, 2022, we identified certain events and circumstances that indicated a decline in value of our investment in this joint venture that was other-than-temporary. Consequently, in the second quarter of 2022, we wrote down the investment in the joint venture to its fair value of $i0,
resulting in an impairment charge of approximately $i9.6 million. In February 2023, we entered into a Share Purchase Agreement to transfer our equity ownership interest to the joint venture partner, thereby terminating our equity ownership interest.
iUse
of Estimates – In preparing our consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”), we make estimates and assumptions that affect the amounts reported and the accompanying notes. We regularly evaluate the estimates and assumptions used and revise them as new information becomes available. Actual results may vary from those estimates.
iInterim Financial Statements – The accompanying consolidated financial statements include the assets, liabilities, operating results, and cash flows of the
Company and its wholly owned subsidiaries. These financial statements are prepared in accordance with GAAP for interim financial information, the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These unaudited interim financial statements should be read in conjunction with the Company's annual consolidated financial statements and accompanying notes in our 2022 Form 10-K.
2.iRecent
Accounting Standards
i
Adoption of Accounting Standard Updates
Effective January 1, 2023, we adopted ASU 2021-08 - Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts
with Customers (“ASU 2021-08”). The amendments in ASU 2021-08 require that an acquiring entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”). At the acquisition date, an acquirer should account for the related revenue contracts in accordance with ASC Topic 606 as if it had originated the contracts.
The adoption of this standard did not have a material impact on our consolidated financial statements and disclosures.
3.iRevenue Recognition
iThe
following table shows disaggregated net revenues from contracts with external customers by timing of revenue and by segment for the three and six months ended June 30, 2023 and 2022:
As of June 30, 2023, and December 31, 2022, contract assets included in “Prepaid expenses and other current assets” on the Consolidated Balance Sheets totaled approximately $i18.8 million and $i19.8
million, respectively, resulting from revenue recognized over time in excess of the amount billed to the customer.
When we receive consideration from a customer prior to transferring goods or services under the terms of a sales contract, we record deferred revenue, which represents a contract liability. Deferred revenue totaled $i13.8 million and $i12.1
million at June 30, 2023 and December 31, 2022, respectively. We recognize deferred revenue after we have transferred control of the
goods or services to the customer and all revenue recognition criteria are met.
4.iAcquisitions
Acquisition of Regulatory
Compliance Associates Inc.
On November 4, 2021, we acquired Regulatory Compliance Associates Inc. (“RCA”) for approximately $i30.6 million, net of $i0.6
million of cash acquired. RCA is an industry leader in providing life sciences consulting focused on quality, regulatory, and technical advisory services for the pharmaceutical, medical device and combination device industries. Headquartered in Pleasant Prairie, Wisconsin, RCA expands and further strengthens our technical consulting and expert advisory capabilities within our Nelson Labs segment.
The purchase price of RCA was allocated to the underlying assets acquired and liabilities assumed based upon management's estimated fair values at the date of acquisition. As of June 30, 2023, approximately $i25.3
million of goodwill was recorded related to the RCA acquisition, representing the excess of the purchase price over the estimated fair values of all of the assets acquired and liabilities assumed. We also recorded $i6.4 million of finite-lived intangible assets, primarily related to customer relationships. We funded this acquisition using available cash. The acquisition price and the results of operations for this acquired entity are not material in relation to our consolidated financial
statements.
Interest
receivable - interest rate cap settlement
i7,596
i—
Interest
receivable - Illinois EO litigation settlement funds(a)
i1,319
i—
Other
i14,625
i9,101
Prepaid
expenses and other current assets
$
i90,910
$
i80,995
/
(a)Represents
interest receivable on funds on deposit in a settlement escrow fund that was used to pay all settlement fees and expenses and cash payments to the Eligible Claimants participating in the Illinois EO litigation settlement. Refer to Note 15, “Commitments and Contingencies”.
7.iGoodwill and Other Intangible Assets
i
Changes
to goodwill during the six months ended June 30, 2023 were as follows:
(a)Includes
certain transportation certifications, a class 1B nuclear license and other intangibles related to obtaining such licensure. These assets are considered indefinite-lived as the decision for renewal by the Canadian Nuclear Safety Commission is highly based on a licensee’s previous assessments, reported incidents, and annual compliance and inspection results. New applications for license can take a significant amount of time and cost; whereas an existing licensee with a historical record of compliance and current operating conditions more than likely ensures renewal for another i10-year license period as Nordion has demonstrated over its 75 years of history.
//
Amounts
include the impact of foreign currency translation. Fully amortized amounts are written off.
Amortization expense for other intangible assets was $i20.5 million ($i4.4 million is included in “Cost
of revenues” and $i16.1 million in “Amortization of intangible assets”) and $i41.1 million ($i8.8
million is included in “Cost of revenues” and $i32.3 million in “Amortization of intangible assets”) in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2023, respectively.
Amortization expense for other intangible assets was $i21.2 million ($i5.4 million is included
in “Cost of revenues” and $i15.8 million in “Amortization of intangible assets”) and $i41.4 million ($i9.8
million is included in “Cost of revenues” and $i31.6 million in “Amortization of intangible assets”) in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2022, respectively.
i
The
estimated aggregate amortization expense for finite-lived intangible assets for each of the next five years and thereafter is as follows:
(thousands of U.S. dollars)
For the remainder of 2023
$
i40,372
2024
i80,050
2025
i42,671
2026
i22,492
2027
i21,416
Thereafter
i144,626
Total
$
i351,627
/
The
weighted-average remaining useful life of the finite-lived intangible assets was approximately inine years as of June 30, 2023.
On December 13, 2019, Sotera Health Holdings, LLC (“SHH”), our wholly owned subsidiary, entered into senior secured first lien credit facilities (the “Senior Secured Credit Facilities”), consisting of both a prepayable senior secured first lien term loan (the “Term Loan”) and a senior secured first lien revolving credit facility (the “Revolving Credit Facility”) pursuant to a first lien credit agreement (the “Credit Agreement”). The Term Loan matures on December 13, 2026. After giving effect to the Revolving Credit Facility Amendment (defined below), the total borrowing capacity under the Revolving Credit Facility is $i423.8
million. The Senior Secured Credit Facilities also provide SHH the right at any time and under certain conditions to request incremental term loans or incremental revolving credit commitments based on a formula defined in the Senior Secured Credit Facilities. As of June 30, 2023 and December 31, 2022, total borrowings under the Term Loan were $ii1,763.1/
million. The weighted average interest rate on borrowings under the Term Loan for the three months ended June 30, 2023 and June 30, 2022 was i7.89% and i3.53%, respectively,
and i7.66% and i3.39% for the six months ended June 30, 2023 and June 30, 2022, respectively.
On February
23, 2023, we entered into the First Lien Credit Agreement (the “2023 Credit Agreement”), which provides for, among other things, a new Term Loan B facility (the “2023 Term Loan”) in an aggregate principal amount of $i500.0 million and bears interest, at the Company’s option, at a variable rate per annum equal to either (x) the Term Secured Overnight Financing Rate (“Term SOFR”) (as defined in the 2023 Credit Agreement) plus an applicable margin of i3.75%
or (y) an alternative base rate (“ABR”) plus an applicable margin of i2.75%. The 2023 Credit Agreement is secured on a first priority basis on substantially all of our assets and is guaranteed by certain of our subsidiaries. It is prepayable without premium or penalty at any time isix
months after the closing date. The principal balance shall be paid at i1% of the aggregate principal amount ($i5.0 million) per year, with the balance due at the end of 2026. The
Company used the proceeds of the 2023 Term Loan to fund a previously announced $i408.0 million EO litigation settlement in Cook County, Illinois and pay down the $i200.0 million of existing borrowings under the
Revolving Credit Facility concurrent with the funding of the 2023 Term Loan on February 23, 2023. In addition, the Company plans to use the remaining proceeds to further enhance liquidity and for general
corporate purposes. The weighted average interest rate on borrowings under the 2023 Term Loan for the three and six months ended June 30,
2023 was ii8.82/%.
On March
21, 2023, the Company entered into an Incremental Facility Amendment to the Credit Agreement (“Revolving Credit Facility Amendment”), which provides for an increase in the commitments under the existing Revolving Credit Facility in an aggregate principal amount of $i76.3 million. In addition, certain of the lenders providing revolving credit commitments provided additional commitments for the issuance of the letters of credit under the Revolving Credit Facility in an aggregate
principal amount of $i165.1 million. The Revolving Credit Facility Amendment also provides for the replacement of the reference interest rate option for Revolving Loans from London Interbank Offered Rate (“LIBOR”) to SOFR plus an applicable credit spread adjustment of i0.10%
(subject to a minimum floor of i0.00%). After giving effect to the Revolving Credit Facility Amendment, the aggregate amount of the Lenders’ Revolving Commitments is $i423.8 million. The maturity date of the Revolving
Credit Facility remains June 13, 2026. The Company borrowed $i200.0 million under the Revolving Credit Facility during the fourth quarter of 2022, which was repaid in the first quarter of 2023, as noted above. As of June 30, 2023, there were ino
borrowings outstanding under the Revolving Credit Facility.
The Senior Secured Credit Facilities and 2023 Credit Agreement contain additional covenants that, among other things, restrict, subject to certain exceptions, our ability and the ability of our restricted subsidiaries to engage in certain activities, such as incur indebtedness or permit to exist any lien on any property or asset now owned or hereafter acquired, as specified in the Senior Secured Credit Facilities and 2023 Credit Agreement. The Senior Secured Credit Facilities and 2023 Credit Agreement also contain certain customary affirmative covenants and events of default, including upon a change of control. An event of default under the Senior Secured Credit Facilities and 2023 Credit Agreement would occur if the
Company or certain of its subsidiaries received one or more enforceable judgment for payment in an aggregate amount in excess of $i100.0 million, which judgment or judgments are not stayed or remain undischarged for a period of i60
consecutive days or if, in order to enforce such a judgment, a judgment creditor attached or levied upon assets that are material to the business and operations, taken as a whole,
of the Company and certain of its subsidiaries. As of June 30, 2023, we were in compliance with all of the Senior Secured Credit Facilities and 2023 Credit Agreement covenants.
All of SHH’s obligations under the Senior Secured Credit Facilities and 2023 Credit Agreement are unconditionally guaranteed by the Company and each existing and subsequently acquired or organized direct or indirect wholly-owned
domestic restricted subsidiary of the Company, with customary exceptions including, among other things, where providing such guarantees is not permitted by law, regulation or contract or would result in material adverse tax consequences. All obligations under the Senior Secured Credit Facilities and 2023 Credit Agreement, and the guarantees of such obligations, are secured by substantially all assets of the borrower and guarantors, subject to permitted liens and other exceptions and exclusions, as outlined in the Senior Secured Credit Facilities and 2023 Credit Agreement.
Outstanding letters of credit are collateralized by encumbrances against the Revolving Credit Facility and the collateral pledged thereunder, or by cash placed on deposit with the
issuing bank. As of June 30, 2023, the Company had $i51.7 million of letters of credit issued against the Revolving Credit Facility, resulting in total availability under the Revolving Credit Facility of $i372.1
million.
Term Loan Interest Rate Risk Management
The Company utilizes interest rate derivatives to eliminate the variability of cash flows in the interest payments associated with our variable rate debt due to changes in LIBOR (up to June 22, 2023) and Term SOFR. For additional information on the derivative instruments described above, refer to Note 16, “Financial Instruments and Financial Risk”, “Derivative Instruments.”
LIBOR Transition
Publication of all U.S. LIBOR tenors ceased after June 30, 2023. To align with the market phaseout of LIBOR, SHH entered into an amendment
to the Senior Secured Credit Facilities to replace the LIBOR-based reference interest rate option under the Term Loan with a reference interest rate option based on Term SOFR plus an applicable credit spread adjustment of i0.11448% (for one-month interest periods), i0.26161%
(for three-month interest periods) and i0.42826% (for six-month interest periods) (in all cases, subject to a minimum floor of i0.50%).
In accordance with ASC 848 Reference Rate Reform, we have elected to apply certain optional expedients for contract modifications and hedging relationships for derivative instruments impacted by the benchmark interest rate transition. The optional expedients remove the requirement to remeasure contract modifications or dedesignate hedging relationships impacted by reference rate reform.
Aggregate Maturities
i
Aggregate
maturities of the Company’s long-term debt, excluding debt discounts, as of June 30, 2023, are as follows:
(thousands of U.S. dollars)
2023
$
i2,950
2024
i5,000
2025
i5,000
2026
i2,250,600
2027
i—
Thereafter
i—
Total
$
i2,263,550
/
10.iIncome
Taxes
Income tax expense is provided on an interim basis based upon our estimate of the annual effective income tax rate. In determining the estimated annual effective income tax rate, we analyze various factors, including projections of our annual earnings and the taxing jurisdictions where the earnings will occur, the impact of state and local taxes, our ability to utilize tax credits and net operating loss carryforwards and available tax planning alternatives. Our effective tax rates were i31.8% and i33.9%
for the three and six months ended June 30, 2023, respectively, compared to i36.8% and i34.6% for the three and six months ended June 30, 2022, respectively.
Income
tax expense for the three months ended June 30, 2023 differed from the statutory rate primarily due to the impact of the foreign rate differential, the valuation allowance attributable to the limitation on the deductibility of interest expense, and global intangible low-tax income (“GILTI”). Income tax expense for the three months ended June 30, 2022 differed from the statutory rate primarily due to a net increase in the valuation allowance attributable to the limitation on the deductibility of interest expense, the impact of the foreign rate differential, and GILTI.
Income tax expense for the six months ended June 30, 2023 differed from the statutory rate primarily due to the impact of the foreign rate differential, the
valuation allowance attributable to the limitation on the deductibility of interest expense and GILTI, partially offset by a benefit for state income taxes. Income tax expense for the six months ended June 30, 2022 differed from the statutory rate primarily due to a net increase in the foreign rate differential and GILTI.
11.iEmployee Benefits
The
Company sponsors various post-employment benefit plans including, in certain countries outside the U.S., defined benefit and defined contribution pension plans, retirement compensation arrangements, and plans that provide extended health care coverage to retired employees, the majority of which relate to Nordion.
Defined benefit pension plan
The following defined benefit pension plan disclosure relates to Nordion. Certain immaterial foreign defined benefit pension plans have been excluded from the table below. The interest cost, expected return on plan assets and amortization of net actuarial gain are recorded in “Other expense (income), net” and the service cost component is included in the same financial statement line item as the applicable employee’s wages in the Consolidated Statements of Operations and Comprehensive
Income (Loss). iThe components of net periodic pension benefit for the defined benefit plan for the three and six months ended June 30, 2023 and 2022 were as follows:
Three
Months Ended June 30,
Six Months Ended June 30,
(thousands of U.S. dollars)
2023
2022
2023
2022
Service cost
$
i132
$
i247
$
i263
$
i496
Interest
cost
i2,742
i1,889
i5,466
i3,792
Expected
return on plan assets
(i4,046)
(i3,676)
(i8,065)
(i7,380)
Net
periodic benefit
$
(i1,172)
$
(i1,540)
$
(i2,336)
$
(i3,092)
Other
benefit plans
Other benefit plans disclosed below relate to Nordion and include a supplemental retirement arrangement, a retirement and termination allowance, and post-retirement benefit plans, which include contributory health and dental care benefits and contributory life insurance coverage. Certain immaterial other foreign benefit plans have been excluded from the table below. All but one non-pension post-employment benefit plans are unfunded. The components of net periodic benefit cost for the other benefit plans for the three and six months ended June 30, 2023 and 2022 were as follows:
Three
Months Ended June 30,
Six Months Ended June 30,
(thousands of U.S. dollars)
2023
2022
2023
2022
Service cost
$
i2
$
i4
$
i4
$
i8
Interest
cost
i90
i65
i180
i130
Amortization
of net actuarial gain
(i44)
(i2)
(i88)
(i4)
Net
periodic benefit cost
$
i48
$
i67
$
i96
$
i134
We
currently expect funding requirements of approximately $i0.3 million in each of the next five years to fund the regulatory solvency deficit, as defined by Canadian federal regulation, which requires solvency testing on defined benefit pension plans.
The Company may obtain a qualifying letter of credit for solvency payments, up to i15%
of the market value of solvency liabilities as determined on the valuation date, instead of paying cash into the pension fund. As of June 30, 2023, and December 31, 2022, we had letters of credit outstanding relating to the defined benefit plans totaling $i43.7 million and $i44.1
million, respectively. The actual funding requirements over the ifive-year period will be dependent on subsequent annual actuarial valuations. These amounts are estimates, which may change with actual investment performance, changes in interest rates, any pertinent changes in Canadian government regulations and any voluntary contributions.
12.iOther
Comprehensive Income (Loss)
Amounts in accumulated other comprehensive income (loss) are presented net of the related tax. Foreign currency translation is not adjusted for income taxes.
(a)For
defined benefit pension plans, amounts reclassified from accumulated other comprehensive income (loss) are recorded to “Other expense (income), net” within the Consolidated Statements of Operations and Comprehensive Income (Loss).
(b)For interest rate derivatives, amounts reclassified from accumulated other comprehensive income (loss) are recorded to “Interest expense, net” within the Consolidated Statements of Operations and Comprehensive Income (Loss).
Restricted stock distributed in respect of pre-IPO Class B-1 time vesting units vests on a daily basis pro rata over a ifive-year
vesting period (iiiii20////%
per year) beginning on the original vesting commencement date of the corresponding Class B-1 time vesting units, subject to the grantee’s continued services through each vesting date. Upon the occurrence of a change in control of the Company, all then outstanding unvested shares of our common stock distributed in respect of Class B-1 Units will become vested as of the date of consummation of such change in control, subject to the grantee’s continued services through the consummation of the change in control.
Restricted stock distributed in respect of pre-IPO Class B-2 Units (which were considered performance vesting units) are scheduled to vest only upon satisfaction of certain thresholds. These units generally vest as of the first date on which (i) our Sponsors have received actual cash proceeds in an amount equal to or in excess of at
least two and one-half times their invested capital in Sotera Health Topco Parent, L.P. (of which the Company was a direct wholly owned subsidiary prior to the IPO) and (ii) the Sponsors’ internal rate of return exceeds i20%, subject to such grantee’s continued services through such date. In the event of a change in control of the Company, any outstanding shares of our common stock distributed in respect of Class B-2 Units that remain unvested immediately following the consummation
of such a change in control of the Company shall be immediately canceled and forfeited without compensation. Stock based compensation expense attributed to the pre-IPO Class B-2 awards was recorded in the fourth quarter of 2020 as the related performance conditions were considered probable of achievement and the implied service conditions were met. As of June 30, 2023, these awards remain unvested.
We recognized $i0.5
million and $i0.5 million of share-based compensation expense related to the pre-IPO Class B-1 awards for the three months ended June 30, 2023 and 2022, respectively, and $i1.0
million and $i1.1 million for the six months ended June 30, 2023 and 2022, respectively.
i
A summary
of the activity for the six months ended June 30, 2023 related to the restricted stock awards distributed in respect of the pre-IPO awards (Class B-1 and B-2 Units) is presented below:
We maintain a long-term incentive plan (the “2020 Omnibus Incentive Plan” or the “2020 Plan”) that allows for grants of incentive stock options to employees (including employees of any of our subsidiaries), nonstatutory stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and other cash-based, equity-based or equity-related awards to employees, directors, and consultants, including employees or consultants of our subsidiaries.
We recognized $i7.9
million ($i3.7 million for stock options and $i4.2 million for RSUs) and $i5.3
million ($i2.2 million for stock options and $i3.1 million for RSUs) of share-based compensation expense for these awards for the three months ended June 30, 2023
and 2022, respectively. We recognized $i14.7 million ($i6.8 million for stock options and $i7.9
million for RSUs) and $i9.2 million ($i3.7 million for stock options and $i5.5
million for RSUs) for the six months ended June 30, 2023 and 2022, respectively, in our Consolidated Statements of Operations and Comprehensive Income (Loss), in “Selling, general and administrative expenses.”
Stock options generally vest ratably over a period of two to ifour
years. They have an exercise price equal to the fair market value of a share of common stock on the date of grant, and a contractual term of i10 years. iThe following
table summarizes our stock option activity for the six months ended June 30, 2023:
As
of June 30, 2023, there were ii1.4/
million vested and exercisable stock options.
RSUs
RSUs generally vest ratably over a period of one to ifour years and are valued based on our market price on the date of grant. iThe
following table summarizes our unvested RSUs activity for the six months ended June 30, 2023:
Basic earnings per share represents the amount of income attributable to each common share outstanding. Diluted earnings per share represents the amount of income attributable to each common share outstanding adjusted for the effects of potentially dilutive common shares. Potentially dilutive common shares include stock options and other stock-based awards. In the periods where the effect would be antidilutive, potentially dilutive common shares are excluded from the calculation of diluted earnings per share.
In periods in which the Company has net income, earnings per share is calculated using the two-class method. This method is required as unvested restricted stock distributed in respect of pre-IPO Class B-1 and B-2 awards have the right to receive non-forfeitable dividends
or dividend equivalents if the Company were to declare dividends on its common stock. Pursuant to the two-class method, earnings for each period are allocated on a pro-rata basis to common stockholders and unvested pre-IPO Class B-1 and B-2 restricted stock awards. Diluted earnings per share is computed using the more dilutive of (a) the two-class method, or (b) treasury stock method, as applicable, to the potentially dilutive instruments.
From time to time, we may be subject to various lawsuits and other claims, as well as gain contingencies, in the ordinary course of our business. In addition, from time to time, we receive communications from government or regulatory agencies concerning investigations or allegations of noncompliance with laws or regulations in jurisdictions in which we operate.
We establish reserves for specific liabilities in connection with regulatory and legal actions that we determine to be both probable and reasonably estimable. As of June 30, 2023 no material amounts have been accrued in our consolidated financial statements with respect to any loss contingencies. If a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent
liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed. In certain of the matters described below, we are not able to make a reasonable estimate of any liability because of the uncertainties related to the outcome and/or the amount or range of loss. While it is not possible to determine the ultimate disposition of each of these matters, we do not expect that the ultimate resolution of pending regulatory and legal matters in future periods, including the matters described below, will have a material effect on our financial condition, results of operations or liquidity. Despite the above, the Company may incur material defense and settlement costs, diversion of management resources and other adverse effects on our business, financial condition, or results of operations.
Ethylene
Oxide Tort Litigation
Sterigenics U.S., LLC (“Sterigenics”) and other medical supply sterilization companies have been subjected to tort lawsuits alleging various injuries caused by low-level environmental exposure to EO emissions from sterilization facilities. Those lawsuits, as detailed further below, are individual claims, as opposed to class actions.
More than i854
plaintiffs filed lawsuits, and approximately i28 individuals threatened to file lawsuits, against subsidiaries of the Company and other parties, alleging personal injuries (including cancer and other diseases) or wrongful death resulting from purported emissions and releases of EO from Sterigenics’ former Willowbrook facility. Additional derivative claims were alleged on behalf of relatives of some of these
personal injury plaintiffs. The lawsuits were consolidated for pre-trial purposes by the Circuit Court of Cook County, Illinois (the “Consolidated Case”). Jury trials were conducted during 2022 in itwo of the individual cases included in the Consolidated Case, and i12
individual cases were scheduled for trials in 2023. The first trial began on August 12, 2022, and on September 19, 2022, the jury rendered a verdict in favor of the plaintiff and awarded damages in the amount of $i358.7 million, including $i36.1
million of compensatory damages, $i320.0 million of punitive damages and $i2.6 million of prejudgment interest against Sterigenics and Sotera Health LLC (the “Defendant
Subsidiaries”). Post-judgment interest accrued on the compensatory and punitive damages awards from September 20, 2022, the date of the judgment order. The Defendant Subsidiaries filed a Motion for Post Trial Relief, which was denied on December 19, 2022. On January 9, 2023 the Defendant Subsidiaries filed a Notice of Appeal to the First District Appellate Court in Illinois, appealing the September 20, 2022 adverse judgment. The deadline for posting an appellate bond for the appeal was extended to
February 8, 2023. The second individual trial began on October 6, 2022, and on November 18, 2022, the jury returned a defense verdict on all counts. On January 4, 2023, the plaintiff in the second trial filed a motion for post-trial relief seeking an order reversing and/or vacating the verdict, granting a new trial, and/or entering judgment in the plaintiff’s favor notwithstanding the verdict.
On November 1, 2022 certain plaintiffs in the Consolidated Case filed a lawsuit in the Circuit Court of Cook County against the Company and certain affiliates, subsidiaries
and current and former officers, alleging that certain transfers of assets occurring after December 2016 were intended to make assets unavailable to satisfy judgments the plaintiffs might win in future trials in their individual personal injury cases included in the Consolidated Case (the “Asset Transfer Case”). On November 10, 2022, the Asset Transfer Case was removed to the United States District Court for the Northern District of Illinois and all defendants filed answers and affirmative defenses.
On January 9, 2023, the Defendant Subsidiaries (the “Settling Defendants”) entered into binding term sheets (the “Term Sheets”) with the “Plaintiffs’ Executive Committee” (the “PEC”) appointed to act on behalf
of the more than i20 law firms (“Plaintiffs’ Counsel”) representing the plaintiffs in the Consolidated Case, the Asset Transfer Case, and other clients with personal injury claims that had not yet been filed (each an “Eligible Claimant” and collectively, the “Eligible Claimants”). Upon entering into the Term Sheets, and based on our assessment that it was probable that the conditions to the Term Sheets would be satisfied or waived, we recorded a charge of $i408.0
million for the year ended December 31, 2022. The Term Sheets provided an agreed path to final settlement of the Eligible Claimants’ claims, subject to the satisfaction or waiver of certain conditions, including but not limited to the negotiation and execution of full settlement agreements in accordance with the Term Sheets.
On January 11, 2023 and January 13, 2023, the Circuit Court of Cook County entered orders staying all proceedings and deadlines and vacating all trial dates in the Consolidated Case, and staying all enforcement proceedings relating to the September 20, 2022 adverse judgment. On January 16, 2023 the United States District Court for the Northern District of Illinois
entered an order staying all proceedings in the Asset Transfer Case. On January 23, 2023 the First District Appellate Court in Illinois entered an order staying the Settling Defendants’ appeal of the September 20, 2022 adverse judgment.
On March 28, 2023, the Settling Defendants and the PEC entered into full settlement agreements (the “Settlement Agreements”). The Settlement Agreements provided a pathway to resolve the claims that were or could have been alleged by i882
Eligible Claimants related to or arising from alleged emissions of EO from Sterigenics’ operations in or around Willowbrook and related claims that were or could have been alleged by Eligible Claimants seeking to challenge any transfer of assets to or from the Company, its subsidiaries and certain affiliates to any other entity or person (the “Covered Claims”). The Company and Settling Defendants deny any liability for the Covered Claims and, per their express terms, the Settlement Agreements are not to be construed as an admission of liability or that the Company or Settling Defendants engaged in any wrongful, tortious,
or unlawful activity or that use and/or emissions of EO from Sterigenics’ operations in or around Willowbrook posed any safety hazard to the surrounding communities.
The Settlement Agreements provided that final settlement was conditioned, among other things, on successful completion of a claims administration process and satisfaction (or waiver by the Settling Defendants) of specific participation requirements, the dismissal with prejudice of the Covered Claims of all Eligible Claimants participating
in the settlement, and court approval of the settlement as a good faith settlement under the Illinois Joint Contribution Among Tortfeasors Act.
On May 1, 2023, Sterigenics contributed $i408.0 million to settlement escrow funds (the “Settlement Funds”) to be used, if the conditions of the Settlement Agreements were satisfied or waived, to pay all settlement fees and expenses and cash payments to the Eligible Claimants participating in the settlement.
The
claims administration process concluded with i879 of i882 Eligible Claimants providing opt-in consent to participate in the settlement (the “Settling Claimants”). Pursuant to the Settlement Agreements, the ithree
Eligible Claimants who did not opt in (each a “Non-Settling Claimant,” and collectively the “Non-Settling Claimants”) created an option for the Settling Defendants to exercise walkaway rights. On June 22, 2023, after evaluating the available information about the claims of the Non-Settling Claimants, the Settling Defendants waived their walkaway rights and chose to proceed to final settlement with the Settling Claimants (the “Willowbrook Settlement”).
On June 23, 2023 the Circuit Court of Cook County entered an order confirming that the Willowbrook Settlement was a good-faith settlement under the Illinois Contribution Among Joint Tortfeasors Act. On June 30, 2023, the Settlement Funds were released from escrow to the PEC’s Qualified Settlement Funds. The
amounts allocated by the PEC to the Non-Settling Claimants represent an immaterial fraction of the Settlement Funds and will remain in escrow until December 31, 2023, at which point, absent an opt-in election by a Non-Settling Claimant, the funds allocated to that Non-Settling Claimant will revert to Sterigenics. On July 6, 2023, the claims of the Settling Claimants against the Settling Defendants were dismissed with prejudice, with the Circuit Court of Cook County retaining jurisdiction to adjudicate disputes over liens on the settlement proceeds to be paid to the Settling Claimants and to oversee the administration of the settlements of the wrongful death cases.
The ithree
Non-Settling Claimants’ cases will proceed in the Circuit Court of Cook County, Illinois. In June 2023, isix new personal injury lawsuits relating to the Willowbrook facility were filed in the Circuit Court of Cook County against Sterigenics, Sotera Health Services, LLC and other parties (the “Post-Settlement Cases”). One Post-Settlement Case has been removed to the United States District Court for the Northern District of Illinois, and a motion to remand is pending. The remaining Post-Settlement Cases will proceed in the Circuit Court of Cook County.
Georgia
Subsidiaries
of the Company and other parties are defendants in lawsuits in the State Court of Cobb County, Georgia and the State Court of Gwinnett County, Georgia in which plaintiffs allege personal injury and property devaluation resulting from emissions or releases of EO from or at Sterigenics’ Atlanta facility, and seek damages and other forms of relief.
iOne personal injury lawsuit pending in Gwinnett County is scheduled for trial in October 2023. Approximately
i300 personal injury lawsuits pending in Cobb County have been consolidated for pretrial purposes (the “Consolidated Personal Injury Cases”). The Consolidated Personal Injury Cases are proceeding under a case management order pursuant to which a “pool” of iten
personal injury cases will proceed to determination of general causation issues in Phase 1 and, specific causation issues in Phase 2; the remaining Consolidated Personal Injury Cases are stayed. iOne personal injury lawsuit pending in Cobb County has not been consolidated and is proceeding independently. iNine
lawsuits pending in Cobb County include both personal injury and property claims (the “Dual Injury Cases”). By agreement of the parties, the Dual Injury Cases will be included in the Consolidated Personal Injury Cases and stayed.
Our subsidiaries are also defendants in approximately i366 property devaluation lawsuits. iOne
property lawsuit is pending in Gwinnett County and the parties are conducting discovery. The remaining property lawsuits are pending in Cobb County and have been consolidated for pretrial purposes (the “Consolidated Property Cases”). The Consolidated Property Cases are proceeding under a case management order pursuant to which iten cases will proceed with dispositive motions and discovery, and the remaining cases are stayed.
On December 22, 2020, the New Mexico Attorney General filed a lawsuit in the Third Judicial District Court, Doña Ana County, New Mexico against the Company and certain subsidiaries alleging that emissions and releases of EO from Sterigenics’ facility in Santa Teresa, New Mexico have deteriorated the air quality in Santa Teresa and surrounding communities and materially contributed to increased health risks suffered by residents of those communities. The Complaint asserts
claims for public nuisance, negligence, strict liability, violations of New Mexico’s Public Nuisance Statute and Unfair Practices Act and seeks various forms of relief including a temporary restraining order, preliminary injunctive relief and damages. On June 29, 2021, the Court entered an Order Granting Preliminary Injunction (the “Order”) prohibiting Sterigenics from allowing any uncontrolled emission or release of EO from the facility. On December 20, 2021 the Court entered an order establishing a protocol to monitor Sterigenics’ compliance with the Order. Operations at the facility continue to be in compliance with the June 2021 and December 2021 orders. A motion challenging the Court’s jurisdiction over Sotera Health Company and another defendant, and a motion for summary judgment by Sterigenics and Sotera Health LLC are pending. A Scheduling Order was entered
on September 13, 2022, including a June 3, 2024 trial date. The Company expects the Court to issue rulings on the pending motions and address the schedule for the remainder of the case in August 2023.
On April 24, 2023, a lawsuit was filed in the Third Judicial District Court, Doña Ana County, New Mexico against the Company, Sterigenics and certain other subsidiaries alleging wrongful death caused by exposure to emissions and releases of EO from Sterigenics’ facility in Santa Teresa, New Mexico while the decedent was
working at a different company’s facility approximately one mile away. Sterigenics removed the case to the United States District Court for the District of New Mexico on April 27, 2023, and filed a partial motion to dismiss on June 2, 2023.
* * *
Additional EO tort lawsuits may be filed in the future against the Company and/or its subsidiaries relating to Sterigenics’ Willowbrook, Atlanta, Santa Teresa or other EO facilities. The Company denies allegations that its EO operations could or have caused the harms alleged
in such lawsuits, and does not believe that the facts and law justify the September 20, 2022 adverse judgment in the first trial in Illinois or that the verdict and damage awards in that case or the Willowbrook Settlement are predictive of potential future verdicts in other EO tort cases in Illinois or other jurisdictions. The Company intends to defend itself vigorously in all such litigation, which will be presided over by different judges, tried by different counsel presenting different evidence and fact and expert witness testimony at trial, and decided by different juries. Each plaintiff’s claim involves unique facts and evidence, including but not limited to, the circumstances of the plaintiff’s alleged exposure, the type and severity of the plaintiff’s disease and the plaintiff’s medical history and course of treatment. As a result,
we believe that losses in such subsequent cases are not probable and that it is not possible to estimate the range of loss. Due to the uncertainties associated with the amount of any such liability and/or the nature of any other remedy which may be imposed in such litigation, any potential liability determined to be attributable to the Company or any of its subsidiaries arising out of such litigation may have a material adverse effect on the Company’s results of operations, liquidity or financial condition. An estimate of the potential impact on the Company’s results of operations, liquidity or financial condition cannot
be made to a reasonable or meaningful degree of certainty due to the aforementioned uncertainties.
Insurance Coverage for Environmental Liabilities
Our insurance for litigation related to alleged environmental liabilities, like the litigation pending in Illinois, Georgia and New Mexico described above, has limits of $i10.0 million per occurrence and $i20.0
million in the aggregate. The per occurrence limit related to the Willowbrook, Illinois litigation was fully utilized by June 30, 2020. The remaining $i10.0 million was fully utilized by March 31, 2023 for occurrences related to the EO litigation in Georgia and New Mexico described above. Our insurance for future alleged environmental liabilities excludes coverage for EO claims.
In
addition, we are pursuing other insurance coverage for our legal expenses related to litigation like the Illinois, Georgia and New Mexico matters described above. In 2021, Sterigenics filed an insurance coverage lawsuit in the U.S. District Court for the Northern District of Illinois relating to two commercial general liability policies issued in the 1980s (the “No. Dist. of IL Coverage Lawsuit”). The court has issued orders declaring that the defendant insurer owes Sterigenics and another insured party a duty to defend the EO tort litigation relating to the Willowbrook facility and owes Sterigenics approximately $i75.5 million
in defense costs through September 30, 2022. Sterigenics is also a party in insurance coverage lawsuits, pending
in the Delaware Superior Court and the Circuit Court of Cook County, seeking insurance coverage from various historical commercial general liability policies for certain EO litigation settlement amounts and defense costs the insurer in the No. Dist. of IL Coverage Lawsuit may fail to fund. It is unknown how much, if any, of the insurance proceeds
sought will be recovered.
Sotera Health Company Securities Litigation & Related Matters
On January 24, 2023, a putative stockholder class action was filed in the U.S. District Court for the Northern District of Ohio against the Company, its directors, certain senior executives, the Company’s private equity stockholders and the underwriters of the Company’s initial public offering (“IPO”) in November 2020 and the Company’s secondary public offering (“SPO”) in March 2021 (the
“Michigan Funds Litigation”). On April 17, 2023 the court appointed the Oakland County Employees’ Retirement System, Oakland County Voluntary Employees’ Beneficiary Association, and Wayne County Employees’ Retirement System (the “Michigan Funds”) to serve as lead plaintiff to prosecute claims on behalf of a proposed class of stockholders who acquired shares of the Company in connection with our IPO or SPO or between November 20, 2020 and September 19, 2022 (the “Proposed Class”). The Michigan Funds allege that statements made regarding the safety of the Company’s use of EO and/or the litigation and other risks of its EO operations
violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (when made in the registration statements for the IPO and SPO) and violated Sections 10(b), Section 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 (when made in subsequent securities filings and other contexts). On June 1, 2023 the Michigan Funds filed an Amended Complaint seeking damages and other relief on behalf of the Proposed Class. Defendants’ motion to dismiss the Amended Complaint was filed on August 2, 2023. In addition, on May 15, 2023 and July 25, 2023the Company received demands pursuant to 8 Del. C. §220 for inspection of its books and records from individual shareholders purporting to be investigating
the Company’s internal operations, disclosure practices and other matters alleged and at issue in the Michigan Funds Litigation (the “220 Demands”). The Company believes that the allegations and claims by the Michigan Funds and in the 220 Demands are without merit, and plans to vigorously defend the Michigan Funds Litigation.
16.iFinancial
Instruments and Financial Risk
Derivative Instruments
We do not use derivatives for trading or speculative purposes and are not a party to leveraged derivatives.
Derivatives Designated in Hedge Relationships
From time to time, the Company utilizes interest rate derivatives designated in hedge relationships to manage interest rate risk associated with our variable rate borrowings. These instruments are measured at fair value with changes in fair value recorded as a component of “Accumulated other comprehensive income (loss)” on our Consolidated Balance Sheets.
In March 2023, we entered into an interest rate swap agreement with a
notional amount of $i400.0 million. The interest rate swap has a forward start date of August 23, 2023 and expires on August 23, 2025. We have designated the interest rate swap as a cash flow hedge designed to hedge the variability of cash flows attributable to changes in the SOFR benchmark interest rate of our 2023 Term Loan. We receive interest at the one-month Term SOFR rate and pay a fixed interest rate under the terms of the swap agreement.
In May 2022, we entered into
itwo interest rate cap agreements with a combined notional amount of $i1,000.0 million for a total option premium of $i4.1
million. The interest rate caps have a forward start date of July 31, 2023 and expire on July 31, 2024. We have designated these interest rate caps as cash flow hedges designed to hedge the variability of cash flows attributable to changes in the benchmark interest rate of our Term Loan. Under the current terms of the loan agreement, the benchmark interest rate index transitioned from LIBOR to Term SOFR on June 30, 2023. Accordingly, the interest rate cap agreements hedge the variability of cash flows attributable to changes in SOFR by limiting our cash flow exposure related to Term SOFR under a portion of our variable rate borrowings to i3.5%.
In
October 2021, we entered into itwo interest rate cap agreements with a combined notional amount of $i1,000.0 million for a total option premium of $i1.8
million. Both interest rate caps were effective on December 31, 2022 and expire on July 31, 2023. These interest rate caps are designated as cash flow hedges and are designed to hedge the variability of cash flows attributable
to changes in LIBOR (or its successor), the benchmark interest rate being hedged, by limiting our cash flow exposure related to the LIBOR base rate under a portion of our variable
rate borrowings to i1.0%.
Derivatives Not Designated in Hedge Relationships
Additionally, from time to time, the Company enters into interest rate derivatives to manage economic risks associated with our variable rate borrowings that are not designated in hedge relationships. These instruments are recorded at fair value on the Consolidated Balance Sheets, with any changes in the value recorded in “Interest expense, net”
in the Consolidated Statements of Operations and Comprehensive Income (Loss).
The Company also routinely enters into foreign currency forward contracts to manage foreign currency exchange rate risk of our intercompany loans in certain of our international subsidiaries. The foreign currency forward contracts expire on a monthly basis.
Embedded Derivatives
We have embedded derivatives in certain of our customer and supply contracts
as a result of the currency of the contract being different from the functional currency of the parties involved. Changes in the fair value of the embedded derivatives are recognized in “Other expense (income), net” in the Consolidated Statements of Operations and Comprehensive Income (Loss).
i
The following table provides a summary of the notional and fair values of our derivative instruments:
(a)$i1,000.0
million notional amount of interest rate caps designated as hedging instruments have a forward start date beginning on July 31, 2023.
(b)The notional amount of interest rates swaps designated as hedging instruments reflected in the table above has a forward start date beginning on August 23, 2023.
(c)Represents the total notional amounts for certain of the Company’s supply and sales contracts accounted for as embedded derivatives.
/
Embedded
derivatives and foreign currency forward contracts are included in “Prepaid expenses and other current assets” and “Accrued liabilities” on our Consolidated Balance Sheets depending upon their position at period end. Interest rate swaps and interest rate caps are included in “Other assets,” and “Noncurrent liabilities” on the Consolidated Balance Sheets depending upon their position at period end.
The
following tables summarize the activities of our derivative instruments for the periods presented, and the line item they are recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss):
Unrealized gain on interest rate derivatives recorded in interest expense, net
$
i—
$
(i3,100)
$
i—
$
(i9,446)
Realized
gain on interest rate derivatives recorded in interest expense, net(a)
(i9,400)
(i1,279)
(i18,571)
(i1,279)
Unrealized
loss (gain) on embedded derivatives recorded in other expense (income), net
(i973)
i2,435
(i747)
i1,417
Realized
loss (gain) on foreign currency forward contracts recorded in foreign exchange (gain) loss
(i2,393)
i1,035
(i1,944)
(i495)
Unrealized
loss (gain) on foreign currency forward contracts recorded in foreign exchange (gain) loss
i—
i—
(i282)
i—
(a) For
the three and six months ended June 30, 2023, amounts primarily represent quarterly settlement of interest rate caps.
/
We expect to reclassify approximately $i19.3 million of net gains on derivative instruments from accumulated
other comprehensive income (loss) to income during the next 12 months associated with our cash flow hedges. Refer to Note 12,“Other Comprehensive Income (Loss)” for unrealized gains on interest rate derivatives recorded in other comprehensive income (loss) and amounts reclassified from accumulated other comprehensive income to interest expense during the three and six months ended June 30, 2023.
Credit Risk
Certain of our financial assets, including cash and cash equivalents, are exposed to credit risk.
We are also exposed, in our normal course of business, to credit risk from our customers. As of June 30, 2023 and December 31, 2022, accounts receivable was net of an allowance for
uncollectible accounts of $i2.0 million and $i1.9 million, respectively.
Credit risk on financial instruments arises from the potential
for counterparties to default on their contractual obligations to us. We are exposed to credit risk in the event of non-performance, but do not anticipate non-performance by any of the counterparties to our financial instruments. We limit our credit risk by dealing with counterparties that are considered to be of high credit quality. In the event of non-performance by counterparties, the carrying value of our financial instruments represents the maximum amount of loss that would be incurred.
Our credit team evaluates and regularly monitors changes in the credit risk of our customers. We routinely assess the collectability of accounts receivable and maintain an adequate allowance for uncollectible accounts to address potential credit losses. The process includes a review of customer financial information and credit ratings, current market conditions as well as the expected future economic conditions that may impact the collection
of trade receivables. We regularly review our customers’ past due amounts through an analysis of aged accounts receivables, specific customer past due aging amounts, and the history of trade receivables written off. Upon concluding that a receivable balance is not collectible, the balance is written off against the allowance for uncollectible accounts.
Fair Value Hierarchy
The fair value of our financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The valuation techniques we would use to determine such fair values are described as follows: Level 1—fair values determined by inputs utilizing quoted prices in active markets for identical assets or liabilities; Level 2—fair values based on observable inputs other than quoted prices included in Level 1, such
as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable; Level 3—fair values determined by unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants.
Finance
Lease Obligations (with current portion)(e)
i58,677
i—
i58,677
i—
(a)Derivatives
designated as hedging instruments are measured at fair value with changes in fair value recorded as a component of accumulated other comprehensive income (loss). Interest rate caps and swaps are valued using pricing models that incorporate observable market inputs including interest rate and yield curves.
(b)Derivatives that are not designated as hedging instruments are measured at fair value with gains or losses recognized immediately in the Consolidated Statements of Operations and Comprehensive Income (Loss). Embedded derivatives are valued using internally developed models that rely on observable market inputs, including foreign currency forward curves. Foreign currency forward contracts are valued by reference to changes in the forward foreign currency exchange rate over the life of the contract.
(c)Carrying
value of other long-term debt and revolving credit facility approximates fair value.
(d)Carrying amounts of long-term debt instruments are reported net of discounts and debt issuance costs. The estimated fair value of these instruments is based on quoted prices for the term loans due in 2026 in inactive markets as provided by an independent fixed income security pricing service. Fair value approximates carrying value for “Other long-term debt.”
We identify our operating segments based on the way we manage, evaluate and internally report our business activities for purposes of allocating resources and assessing performance. We have ithree
reportable segments: Sterigenics, Nordion and Nelson Labs. We have determined our reportable segments based upon an assessment of organizational structure, service types, and internally prepared financial statements. Our chief operating decision maker evaluates performance and allocates resources based on net revenues and segment income after the elimination of intercompany activities. The accounting policies of our reportable segments are the same as those described in Note 1, “Significant Accounting Policies” of the Company’s annual consolidated financial statements and accompanying notes in our 2022 Form 10-K.
Sterigenics
Sterigenics provides outsourced terminal sterilization and irradiation services for the medical device, pharmaceutical, food safety and advanced applications markets
using three major technologies: gamma irradiation, EO processing and E-beam irradiation.
Nordion
Nordion is a leading global provider of Co-60 used in the sterilization and irradiation processes for the medical device, pharmaceutical, food safety, and high-performance materials industries, as well as in the treatment of cancer. In addition, Nordion is a leading global provider of gamma irradiation systems.
Nelson Labs
Nelson Labs provides outsourced microbiological and analytical chemistry testing and advisory services for the medical device and pharmaceutical industries.
For the three months ended June 30, 2023, five customers reported within the Nordion segment individually represented 10% or
more of the segment’s total net revenues. These customers represented i31.3%, i13.4%, i12.5%,
i10.7%, and i10.7% of the total segment’s external net revenues for the three months ended June 30, 2023. For the three months ended June 30, 2022, four customers reported within the Nordion segment individually represented
10% or more of the segment’s total net revenues. These customers represented i21.7%, i15.4%, i13.2%,
and i15.9% of the total segment’s external net revenues for the three months ended June 30, 2022.
For the six months ended June 30, 2023, four customers reported within the Nordion segment individually represented 10% or more of the segment’s total net revenues. These customers represented i26.3%,
i17.5%, i10.7%, and i10.1%
of the total segment’s external net revenues for the six months ended June 30, 2023. For the six months ended June 30, 2022, four customers reported within the Nordion segment individually represented 10% or more of the segment’s total net revenues. These customers represented i18.8%, i12.8%,
i15.5%, and i10.6% of the total segment's external net revenues for the six months ended June 30, 2022.
Financial information for each of our segments is presented in the following table:
Three
Months Ended June 30,
Six Months Ended June 30,
(thousands of U.S. dollars)
2023
2022
2023
2022
Segment revenues(a)
Sterigenics
$
i166,590
$
i157,792
$
i326,587
$
i307,254
Nordion
i31,975
i50,478
i40,526
i84,480
Nelson
Labs
i56,717
i58,369
i108,759
i111,659
Total
net revenues
$
i255,282
$
i266,639
$
i475,872
$
i503,393
Segment
income(b)
Sterigenics
$
i91,450
$
i85,098
$
i174,290
$
i164,501
Nordion
i17,784
i29,982
i19,310
i48,885
Nelson
Labs
i19,251
i21,055
i33,353
i38,098
Total
segment income
$
i128,485
$
i136,135
$
i226,953
$
i251,484
(a)Revenues
are reported net of intersegment sales. Our Nordion segment recognized $i14.7 million and $i15.8 million in revenues from sales to our Sterigenics
segment for the three months ended June 30, 2023 and 2022, respectively, and $i17.6 million and $i31.3
million in revenues from sales to our Sterigenics segment for the six months ended June 30, 2023 and 2022, respectively, that is not reflected in net revenues in the table above. Intersegment sales for Sterigenics and Nelson Labs are immaterial for these periods.
(b)Segment income is only provided on a net basis to the chief operating decision maker and is reported net of intersegment profits.
/
Corporate operating expenses for executive management, accounting, information technology, legal, human resources, treasury, investor relations, corporate development, tax, purchasing, and marketing not directly
incurred by a segment are allocated to the segments based on total net revenue. Corporate operating expenses that are directly incurred by a segment are reflected in each segment’s income.
Capital expenditures by segment for the six months ended June 30, 2023 and 2022 were as follows:
Six Months Ended June 30,
(thousands of U.S. dollars)
2023
2022
Sterigenics
$
i73,725
$
i55,065
Nordion
i16,283
i10,741
Nelson
Labs
i8,126
i5,836
Total
capital expenditures
$
i98,134
$
i71,642
Total
assets and depreciation and amortization expense by segment are not readily available and are not reported separately to the chief operating decision maker.
Gain
on foreign currency and derivatives not designated as hedging instruments, net(d)
(i409)
(i1,430)
i126
(i7,982)
Acquisition
and divestiture related charges, net(e)
i153
i691
i745
i531
Business
optimization project expenses(f)
i3,322
i470
i5,856
i574
Plant
closure expenses(g)
i129
i478
(i766)
i1,149
Impairment
of investment in unconsolidated affiliate(h)
i—
i9,613
i—
i9,613
Professional
services and other expenses relating to EO sterilization facilities(i)
i17,080
i17,678
i33,382
i35,737
Accretion
of asset retirement obligation(j)
i555
i598
i1,127
i1,118
COVID-19
expenses(k)
i—
i45
i—
i148
Consolidated
income before taxes
$
i34,485
$
i48,108
$
i39,887
$
i93,375
(a)The
three and six months ended June 30, 2023 exclude $i5.5 million and $i7.8 million, respectively, of interest expense, net, on Term Loan B attributable to the loan proceeds that were used to fund the $i408.0
million Illinois EO litigation settlement. The three and six months ended June 30, 2022 exclude $i3.1 million and $i9.4 million, respectively, of unrealized gains on interest rate
derivatives not designated as hedging instruments.
(b)Includes depreciation of Co-60 held at gamma irradiation sites.
(c)Represents share-based compensation expense to employees and non-employee directors.
(d)Represents the effects of (i) fluctuations in foreign currency exchange rates, (ii) non-cash mark-to-fair value of embedded derivatives relating to certain customer and supply contracts at Nordion, and (iii) unrealized gains on interest rate caps not designated as hedging instruments.
(e)Represents (i) certain direct and incremental costs related to the acquisitions of RCA and BioScience Labs and certain
related integration efforts as a result of those acquisitions, (ii) the earnings impact of fair value adjustments (excluding those recognized within amortization expense) resulting from the businesses acquired, and (iii) transition services income and non-cash deferred lease income associated with the terms of the divestiture of the Medical Isotopes business in 2018.
(f)Represents professional fees, exit costs, severance and other payroll costs, and other costs associated with business optimization and cost savings projects relating to the integration of acquisitions, operating structure realignment and other process enhancement projects.
(g)Represents professional fees, severance and other payroll costs, and other costs including ongoing lease and utility expenses associated with the closure of the Willowbrook, Illinois facility.
The six months ended June 30, 2023 also includes a $i1.0 million cancellation fee received from a tenant in connection with the termination of an office space lease at the Nordion facility.
(h)Represents an impairment charge on our equity method investment in a joint venture. Refer to Note 1, “Basis of Presentation”.
(i)Represents litigation and other professional fees associated with our EO sterilization
facilities. This includes $i5.5 million and $i7.8 million of interest expense, net for the three and six months ended June 30, 2023, respectively, associated with Term Loan B that was issued to finance the $i408.0
million cost to settle approximately i880 pending and threatened EO claims against the Settling Defendants in Illinois under Settlement Agreements entered into on March 28, 2023. See Note 15, “Commitments and Contingencies.”
(j)Represents non-cash accretion of asset retirement obligations related to Co-60 and gamma processing facilities, which are based on estimated site remediation costs for any future decommissioning of these facilities (without regard for whether the decommissioning services would be performed
by employees of Nordion, instead of by a third party) and are accreted over the life of the asset.
(k)Represents non-recurring costs associated with the COVID-19 pandemic, including incremental costs to implement workplace health and safety measures.
/
32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following
discussion and analysis in conjunction with our consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2022 Form 10-K. This discussion and analysis contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of various factors, including the factors we describe in the section entitled Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q, as well as Part I, Item 1A, “Risk Factors” in our 2022 Form 10-K.
OVERVIEW
We
are a leading global provider of mission-critical end-to-end sterilization solutions, lab testing and advisory services for the healthcare industry. We are driven by our mission: Safeguarding Global Health®. We provide end-to-end sterilization as well as microbiological and analytical lab testing and advisory services to help ensure that medical, pharmaceutical and food products are safe for healthcare practitioners, patients and consumers in the United States and around the world. Our services are an essential aspect of our customers’ manufacturing process and supply chains, helping to ensure sterilized medical products reach healthcare practitioners and patients. Most of these services are necessary for our customers to satisfy applicable government requirements.
We serve our customers throughout their product lifecycles, from product design to manufacturing and delivery,
helping to ensure the sterility, effectiveness and safety of their products for the end user. We operate across two core businesses: sterilization services and lab services. The combination of Sterigenics, our terminal sterilization business, and Nordion, our Co-60 supply business, makes us the only vertically integrated global gamma sterilization provider in the sterilization industry. For financial reporting purposes, our sterilization services business consists of two reportable segments, Sterigenics and Nordion, and our lab services business consists of one reportable segment, Nelson Labs.
For the three and six months ended June 30, 2023, respectively, we recorded net revenues of $255.3 million and $475.9 million, net income of $23.5 million and $26.4 million, Adjusted Net Income of $59.3 million and $97.3 million, and Adjusted EBITDA of $128.5 million and $227.0 million.
For the definition of Adjusted Net Income and Adjusted EBITDA and the reconciliation of these non-GAAP measures from net income, please see “Non-GAAP Financial Measures.”
STRATEGIC DEVELOPMENTS AND KEY FACTORS AFFECTING OUR RESULTS OF OPERATIONS
The following summarizes strategic developments and key factors that impacted our operating results for the three and six months ended June 30, 2023 and may continue to affect our performance and financial condition in future periods.
•Business and market conditions. Consolidated revenue and net income for the three and six months ended June 30,
2023 declined from the same periods of the prior year, mainly driven by expected Nordion Co-60 harvest schedule timing combined with unfavorable volume and change in mix at Nelson Labs and Sterigenics. Notwithstanding these headwinds, Sterigenics sustained favorable revenue growth for the three and six months ended June 30, 2023 compared to the same periods in the prior year, fueled mainly by the benefits of favorable pricing. As previously disclosed, we continue to expect Nordion Co-60 harvest schedules to improve in the second half of the year.
As discussed in more detail in our 2022 Form 10-K, a portion of our supply of Co-60 is generated by Russian nuclear
reactors. We continue to monitor the potential for disruption in the supply of Co-60 from Russian nuclear reactors but
we
do not expect a material impact for the remainder of 2023 on our supply or revenue.
•Investment initiatives. We remain focused on our investments in capacity expansions and facility improvements as well as in our efforts to strengthen our Co-60 supply chain. For the six months ended June 30, 2023, we increased capital expenditures by $26.5 million compared to the six months ended June 30, 2022.
•Disciplined and strategic M&A activity. We remain committed to our highly disciplined acquisition strategy and continue to seek suitable acquisition targets.
33
•Litigation
costs. We are currently the subject of tort lawsuits alleging personal injury by purported exposure to EO emitted by our former facility in Willowbrook, Illinois and our current facilities in Atlanta, Georgia and Santa Teresa, New Mexico. In addition, we are defendants in a lawsuit brought by the State of New Mexico Attorney General alleging that emissions of EO from our Santa Teresa facility constitute a public nuisance and materially contributed to increased health risks suffered by residents in the area. We maintain that these facilities did not pose and do not pose any safety risk to their surrounding communities. We deny the allegations in these lawsuits and are vigorously defending against these claims.
In connection with the ongoing litigation related to our Willowbrook, Illinois, Atlanta, Georgia and Santa Teresa, New Mexico facilities, as described in Note 15, “Commitments and Contingencies”,
we recorded costs of $17.1 million and $33.4 million for the three and six months ended June 30, 2023, respectively. On January 9, 2023, Sterigenics U.S., LLC and Sotera Health LLC (the “Settling Defendants”) entered into binding term sheets and on March 28, 2023 the Settling Defendants entered into full agreements to settle 879 pending and threatened EO claims against the Defendant Subsidiaries in the Circuit Court of Cook County, Illinois, and U.S. District Court for the Northern District of Illinois (the “Settlement Agreements”). On May 1, 2023, pursuant to the Settlement Agreements, the
Company paid $408.0 million into a settlement escrow fund to settle the claims, subject to the satisfaction or waiver of certain conditions, including but not limited to substantially all of the plaintiffs providing opt-in consents to their individual settlement allocations and dismissing their claims with prejudice.
On June 22, 2023, the opt-in process was completed for the January 2023 settlements of the EO claims against the Settling Defendants in the Circuit Court of Cook County, Illinois and the Settling Defendants elected to proceed with settlements with the 879 eligible claimants who opted in. On June 30, 2023, all but an immaterial fraction of the settlement funds were released from escrow. The claims of the Settling Claimants against the Settling Defendants were dismissed with prejudice. An immaterial fraction
of the settlement funds remains in escrow with respect to three claimants who did not opt in; these funds will revert to Sterigenics U.S., LLC if these claimants do not opt in before December 31, 2023.
The Settlement Agreements provided a pathway to comprehensively resolve the claims pending and threatened against the Company in Illinois and thereby enable the Company to focus its attention on operating the business. The Company denies any liability and maintains that its Willowbrook, Illinois operations did not pose a safety risk to the community in which it operated and believes the evidence ultimately would have compelled
the rejection of the plaintiffs’ claims. See Note 15, “Commitments and Contingencies” to our consolidated financial statements.
•Borrowings, financing costs and financial leverage. On February 23, 2023the Company successfully closed on a new senior secured Term Loan B facility in an aggregate principal amount of $500.0 million. The Company used the proceeds of this debt to pay down existing borrowings under the Company’s revolving credit facility and fund the $408.0 million EO litigation settlement in Cook County, Illinois. In addition, the
Company plans to use the remaining proceeds to further enhance liquidity and for other general corporate purposes.
On March 21, 2023, the Company also entered into an Incremental Facility Amendment to the First Lien Credit Agreement (“Revolving Credit Facility Amendment”), which provides for an increase in the commitments under the existing revolving credit facility in an aggregate principal amount of $76.3 million. The Revolving Credit Facility Amendment also provides additional commitments for the issuance of letters of credit under the Revolving Credit Facility in an aggregate principal amount of $165.1 million. After giving effect to the Revolving Credit Facility Amendment, the aggregate amount of the revolving commitments under the Revolving Credit Facility is $423.8 million.
The following table sets forth the components of our results of operations for the three months ended June 30, 2023 and 2022.
(thousands
of U.S. dollars)
2023
2022
$ Change
% Change
Total net revenues
$
255,282
$
266,639
$
(11,357)
(4.3)
%
Total
cost of revenues
115,694
116,243
(549)
(0.5)
%
Total operating expenses
76,384
78,901
(2,517)
(3.2)
%
Operating
income
63,204
71,495
(8,291)
(11.6)
%
Net income
23,513
30,418
(6,905)
(22.7)
%
Adjusted
Net Income(a)
59,295
75,825
(16,530)
(21.8)
%
Adjusted EBITDA(a)
128,485
136,135
(7,650)
(5.6)
%
(a)Adjusted
Net Income and Adjusted EBITDA are non-GAAP financial measures. For more information regarding our calculation of Adjusted Net Income and Adjusted EBITDA, including information about their limitations as tools for analysis and a reconciliation of net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted Net Income and Adjusted EBITDA, please see the reconciliation included below in “Non-GAAP Financial Measures.”
Total Net Revenues
The following table compares our revenues by type for the three months ended June 30, 2023 to the three months ended June 30, 2022.
Net revenues were $255.3 million in the three months ended June 30, 2023, a decrease of $11.4 million, or 4.3%, as compared with the three months ended June 30, 2022. Excluding the impact of foreign currency exchange rates, net revenues
in the three months ended June 30, 2023 decreased approximately 4.1% compared with the three months ended June 30, 2022.
Service revenues
Service revenues increased $4.5 million, or 2.0%, to $226.1 million in the three months ended June 30, 2023 as compared to $221.5 million in the three months ended June 30, 2022. The growth in net service revenue was driven by favorable pricing of $10.6 million and $2.1 million in the Sterigenics and Nelson Labs segments, respectively, coupled with a $1.0 million favorable impact from changes in foreign currency exchange rates across all segments. Partially offsetting these growth factors was a decline in service revenue volume and change in mix of
$4.1 million, $2.7 million, and $2.4 million in the Nelson Labs, Sterigenics and Nordion segments, respectively.
Product revenues
Product revenues decreased $15.9 million, or 35.2%, to $29.2 million in the three months ended June 30, 2023 as compared to $45.1 million in the three months ended June 30, 2022. The decrease in product revenues was mainly driven by expected volume decline and change in mix of $17.2 million due to Co-60 harvest schedule timing in the Nordion segment and an unfavorable impact from changes in foreign currency exchange rates of $1.6 million. Partially offsetting this decline was a favorable pricing impact of $2.9 million.
Total Cost of Revenues
The following table compares
our cost of revenues by type for the three months ended June 30, 2023 to the three months ended June 30, 2022.
35
(thousands of U.S. dollars)
Cost
of revenues for the three months ended June 30,
2023
2022
$ Change
% Change
Service
$
103,900
$
98,407
$
5,493
5.6
%
Product
11,794
17,836
(6,042)
(33.9)
%
Total
cost of revenues
$
115,694
$
116,243
$
(549)
(0.5)
%
Total cost of revenues accounted for approximately 45.3% and 43.6% of our consolidated net revenues for the three months ended June 30, 2023 and 2022, respectively.
Cost of service revenues
Cost of service revenues increased $5.5 million, or 5.6%, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. The growth in cost of service revenues was partially driven by $3.6 million of depreciation related to capital assets recently placed in service and higher energy costs. In addition, cost of service revenue increased by $2.1 million as a result of higher labor costs, largely stemming from both the addition of new personnel and higher compensation costs.
Cost of product revenues
Cost of product revenues decreased $6.0 million, or 33.9%, for the three months ended June 30, 2023 as compared to the three months ended June 30,
2022. The decrease was primarily a result of lower direct material and material transportation costs of $5.5 million due to expected Co-60 harvest schedule timing in the Nordion segment coupled with a $0.7 million impact due to changes in foreign currency exchange rates.
Operating Expenses
The following table compares our operating expenses for the three months ended June 30, 2023 to the three months ended June 30, 2022:
(thousands
of U.S. dollars)
Operating expenses for the three months ended June 30,
2023
2022
$ Change
% Change
Selling,
general and administrative expenses
$
60,287
$
63,132
$
(2,845)
(4.5)
%
Amortization of intangible assets
16,097
15,769
328
2.1
%
Total
operating expenses
$
76,384
$
78,901
$
(2,517)
(3.2)
%
Operating expenses accounted for approximately 29.9% and 29.6% of our consolidated net revenues for the three months ended June 30, 2023 and 2022, respectively.
Selling, general and administrative
expenses (“SG&A”)
SG&A decreased $2.8 million, or 4.5%, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. The decrease was driven primarily by a $6.0 million decrease in litigation and other professional services expense associated with EO sterilization facilities. Partially offsetting this decrease was a $2.6 million increase in share-based compensation expense attributable to awards granted under the 2020 Omnibus Incentive Plan and $1.0 million in incremental SG&A personnel in support of various business enhancement and compliance efforts.
Amortization of intangible assets
Amortization of intangible assets increased $0.3 million to $16.1 million, or
2.1%, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022 due mainly to changes in foreign currency exchange rates.
36
Interest Expense, Net
Interest expense, net increased $16.7 million, or 118.8%, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. The variance was driven by an increase in the variable interest rate driving increased interest expense of $16.7 million on borrowings previously outstanding in the same period of the prior year coupled
with interest expense of $11.1 million on incremental borrowings. Partially offsetting the increase was a $6.8 million increase in interest income on cash and cash equivalents on deposit at financial institutions and a $5.0 million net favorable change due to interest rate derivative activity. The weighted average interest rate on our outstanding debt was 8.20% and 3.81% at June 30, 2023 and 2022, respectively.
Impairment of Investment in Unconsolidated Affiliate
During the three months ended June 30, 2022, we recorded an impairment charge of $9.6 million related to a joint venture investment in Auralux Enterprises Ltd. (“Auralux”) which was acquired as part of the 2020 Iotron acquisition. Due to a shift in business strategy,
the joint venture will not proceed, and our joint venture partner will continue to rely on our other existing operating facilities. Based on these facts and circumstances, we concluded that the investment was impaired as of June 30, 2022.
Foreign Exchange Loss (Gain)
Foreign exchange loss was $0.5 million for the three months ended June 30, 2023 as compared to a gain of $0.8 million in the three months ended June 30, 2022. The change in foreign exchange loss (gain) in our Consolidated Statements of Operations and Comprehensive Income (Loss) mainly relates to short-term losses (offset by short-term gains) on sales denominated in currencies other than the functional currency of our operating entities. As described in Note 16, “Financial
Instruments and Financial Risk”, we enter into monthly U.S. dollar-denominated foreign currency forward contracts to manage foreign currency exchange rate risk related to our international subsidiaries.
Other Expense (Income), Net
Other income, net was $2.5 million for the three months ended June 30, 2023 compared to other expense of $0.5 million for the three months ended June 30, 2022. The majority of the variance stemmed from an increase in the fair value of Nordion’s embedded derivative assets in the three months ended June 30, 2023, resulting
in an increase in other income of $3.4 million from the three months ended June 30, 2023.
Provision for Income Taxes
Provision for income tax decreased $6.7 million to a net provision of $11.0 million for the three months ended June 30, 2023 as compared to $17.7 million in the three months ended June 30, 2022. The change was primarily attributable to lower pre-tax income for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, partially offset by an increase in the valuation allowance, which was a direct result of the $408.0 million Illinois EO litigation settlement as described in Note 15, “Commitments
and Contingencies”. This expense will eliminate a current deduction of 2023 U.S. interest and increase the valuation allowance against our excess interest expense carryforward balance.
Provision for income taxes for the three months ended June 30, 2023 differed from the statutory rate primarily to the impact of the foreign rate differential, the valuation allowance attributable to the limitation on the deductibility of interest expense, and global intangible low-tax income (“GILTI”). Provision for income taxes for the three months ended June 30, 2022 differed from the statutory rate primarily due to a net increase in the valuation allowance attributable to the limitation on the deductibility of interest expense, the impact of the foreign rate
differential, and GILTI.
Net Income, Adjusted Net Income and Adjusted EBITDA
Net income for the three months ended June 30, 2023 was $23.5 million, as compared to net income of $30.4 million for the three months ended June 30, 2022 due to the factors described above. Adjusted Net Income was $59.3 million for the three months ended June 30, 2023, as compared to $75.8 million for the three months ended June 30, 2022, and Adjusted EBITDA was $128.5 million for the three months ended June 30, 2023, as compared to $136.1 million for the three months ended June 30, 2022. Please see “Non-GAAP
Financial Measures” below for a reconciliation of Adjusted Net Income and Adjusted EBITDA to their most directly comparable financial measure calculated and presented in accordance with GAAP.
The following table sets forth the components of our results of operations for the six months ended June 30, 2023 and 2022.
(thousands
of U.S. dollars)
2023
2022
$ Change
% Change
Total net revenues
$
475,872
$
503,393
$
(27,521)
(5.5)
%
Total
cost of revenues
224,781
224,122
659
0.3
%
Total operating expenses
154,521
154,284
237
0.2
%
Operating
income
96,570
124,987
(28,417)
(22.7)
%
Net income
26,355
61,059
(34,704)
(56.8)
%
Adjusted
Net Income(a)
97,340
136,079
(38,739)
(28.5)
%
Adjusted EBITDA(a)
226,953
251,484
(24,531)
(9.8)
%
(a)Adjusted
Net Income and Adjusted EBITDA are non-GAAP financial measures. For more information regarding our calculation of Adjusted Net Income and Adjusted EBITDA, including information about their limitations as tools for analysis and a reconciliation of net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted Net Income and Adjusted EBITDA, please see the reconciliation included below in “Non-GAAP Financial Measures.”
Total Net Revenues
The following table compares our revenues by type for the six months ended June 30, 2023 to the six months ended June 30, 2022.
Net revenues were $475.9 million in the six months ended June 30, 2023, a decrease of $27.5 million, or 5.5%, as compared with the six months ended June 30, 2022. Excluding the impact of foreign currency exchange rates, net revenues in
the six months ended June 30, 2023 decreased approximately 4.6% compared with the six months ended June 30, 2022.
Service revenues
Service revenues increased $12.8 million, or 3.0%, to $440.6 million in the six months ended June 30, 2023 as compared to $427.7 million in the six months ended June 30, 2022. The growth in net service revenues was driven by favorable pricing of $19.8 million and $4.2 million in the Sterigenics and Nelson Labs segments, respectively. Partially offsetting the favorable price increases was a decline in service revenue volume and change in mix of $6.9 million and $3.3 million in the Nelson Labs and Nordion segments, respectively, coupled with a $1.2 million
unfavorable impact from changes in foreign currency exchange rates across all segments.
Product revenues
Product revenues decreased $40.3 million, or 53.3%, to $35.3 million in the six months ended June 30, 2023 as compared to $75.6 million in the six months ended June 30, 2022. The decrease in product revenues was mainly driven by expected volume decline and change in mix of $40.3 million due to Co-60 harvest schedule timing in the Nordion segment and an unfavorable impact from changes in foreign currency exchange rates of $2.9 million. Partially offsetting this decline was a favorable pricing impact of $2.9 million.
Total Cost of Revenues
The following table compares our cost of revenues by
type for the six months ended June 30, 2023 to the six months ended June 30, 2022.
38
(thousands of U.S. dollars)
Cost
of revenues for the six months ended June 30,
2023
2022
$ Change
% Change
Service
$
208,110
$
192,983
$
15,127
7.8
%
Product
16,671
31,139
(14,468)
(46.5)
%
Total
cost of revenues
$
224,781
$
224,122
$
659
0.3
%
Total cost of revenues accounted for approximately 47.2% and 44.5% of our consolidated net revenues for the six months ended June 30, 2023 and 2022, respectively.
Cost of service revenues
Cost
of service revenues increased $15.1 million, or 7.8%, for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. The growth in cost of service revenues was partially driven by $8.7 million of higher energy costs and depreciation related to capital assets recently placed in service. In addition, cost of service revenue increased by $6.2 million and $1.0 million, respectively, as a result of higher employee compensation and professional service costs. Partially offsetting this increase was a $1.0 million impact from changes in foreign currency exchange rates.
Cost of product revenues
Cost of product revenues decreased $14.5 million, or 46.5%, for the six months ended June 30, 2023 as compared to the six
months ended June 30, 2022. The decrease was primarily a result of lower direct material and material transportation costs of $12.5 million due to expected Co-60 harvest schedule timing in the Nordion segment coupled with a $1.6 million impact due to changes in foreign currency exchanges rates.
Operating Expenses
The following table compares our operating expenses for the six months ended June 30, 2023 to the six months ended June 30, 2022:
(thousands
of U.S. dollars)
Operating expenses for the six months ended June 30,
2023
2022
$ Change
% Change
Selling,
general and administrative expenses
$
122,197
$
122,674
$
(477)
(0.4)
%
Amortization of intangible assets
32,324
31,610
714
2.3
%
Total
operating expenses
$
154,521
$
154,284
$
237
0.2
%
Operating expenses accounted for approximately 32.5% and 30.6% of our consolidated net revenues for the six months ended June 30, 2023 and 2022, respectively.
SG&A
SG&A
decreased $0.5 million, or 0.4%, for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. The decrease was driven primarily by a $10.0 million decrease in litigation and other professional services expense associated with EO sterilization facilities. This decrease was partially offset by the following factors:
•$5.4 million increase in share-based compensation expense attributable to awards granted under the 2020 Omnibus Incentive Plan;
•$2.5 million in professional fees and other costs associated with business optimization and cost savings projects relating to the integration of recent acquisitions; and
•$1.7 million of incremental
SG&A personnel costs in support of various business enhancement and compliance efforts.
Amortization of intangible assets
Amortization of intangible assets increased $0.7 million to $32.3 million, or 2.3%, for the six months ended June 30, 2023 as compared to the three months ended June 30, 2022 due mainly to changes in foreign currency exchange rates.
39
Interest Expense, Net
Interest expense, net increased $35.2 million, or 143.8%, for the six months ended June 30,
2023 as compared to the six months ended June 30, 2022. The variance was driven by an increase in the variable interest rate driving increased interest expense of $33.5 million on borrowings previously outstanding in the same period of the prior year coupled with interest expense of $17.7 million on incremental borrowings. Partially offsetting the increase was a $9.4 million increase in interest income on cash and cash equivalents on deposit at financial institutions and a $7.9 million net favorable change due to interest rate derivative activity. The weighted average interest rate on our outstanding debt was 8.20% and 3.81% at June 30, 2023 and 2022, respectively.
Impairment of Investment in Unconsolidated Affiliate
During the
six months ended June 30, 2022, we recorded an impairment charge of $9.6 million related to a joint venture investment in Auralux, which was acquired as part of the 2020 Iotron acquisition. Due to a shift in business strategy, the joint venture will not proceed, and our joint venture partner will continue to rely on our other existing operating facilities. Based on these facts and circumstances, we concluded that the investment was impaired as of June 30, 2022.
Foreign Exchange Loss
Foreign exchange loss was $0.8 million for the six months ended June 30, 2023 as compared to an immaterial loss in the six months ended June 30, 2022. The change in foreign exchange loss in our Consolidated
Statements of Operations and Comprehensive Income (Loss) mainly relates to short-term losses (offset by short-term gains) on sales denominated in currencies other than the functional currency of our operating entities. As described in Note 16, “Financial Instruments and Financial Risk”, we enter into monthly U.S. dollar-denominated foreign currency forward contracts to manage foreign currency exchange rate risk related to our international subsidiaries.
Other Expense (Income), Net
Other income, net was $3.7 million for the six months ended June 30, 2023 compared to $2.5 million for the six months ended June 30,
2022. The majority of the variance stemmed from an increase in the fair value of Nordion’s embedded derivatives in the six months ended June 30, 2023, resulting in an increase in other income of $2.2 million compared to the same the period in the prior year.
Provision for Income Taxes
Provision for income taxes decreased $18.8 million to a net provision of $13.5 million for the six months ended June 30, 2023 as compared to $32.3 million in the six months ended June 30, 2022. The change was primarily attributable to lower pre-tax income for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, partially
offset by an increase in the the foreign rate differential and valuation allowance against our excess interest expense carryforward balance. The increase in the valuation allowance was a direct result of the $408.0 million Illinois EO litigation settlement, as described in Note 15, “Commitments and Contingencies”. This expense will eliminate a current deduction of 2023 U.S. interest and increases the valuation allowance against our excess interest expense carryforward balance.
Provision for income taxes for the six months ended June 30, 2023 differed from the statutory rate due to the impact of the foreign rate differential, the valuation allowance attributable to the limitation on the deductibility of interest expense and global GILTI, partially offset by a benefit for state income taxes. Provision for income taxes for
the six months ended June 30, 2022differed from the statutory rate primarily due to a net increase in the foreign differential, and GILTI.
Net Income, Adjusted Net Income and Adjusted EBITDA
Net income for the six months ended June 30, 2023 was $26.4 million, as compared to net income of $61.1 million for the six months ended June 30, 2022 due to the factors described above. Adjusted Net Income was $97.3 million for the six months ended June 30, 2023, as compared to $136.1 million for the six months ended June 30, 2022, and Adjusted EBITDA was $227.0 million for the six months ended June 30,
2023, as compared to $251.5 million for the six months ended June 30, 2022. Please see “Non-GAAP Financial Measures” below for a reconciliation of Adjusted Net Income and Adjusted EBITDA to their most directly comparable financial measure calculated and presented in accordance with GAAP.
40
SEGMENT RESULTS OF OPERATIONS
We have three reportable segments: Sterigenics, Nordion and Nelson Labs. Our chief operating decision maker evaluates performance and allocates resources within our business based on Segment Income, which excludes certain items which
are included in income before tax as determined in our Consolidated Statements of Operations and Comprehensive Income (Loss). The accounting policies for our reportable segments are the same as those for the consolidated Company.
Our Segments
Sterigenics
Our Sterigenics business provides outsourced terminal sterilization and irradiation services for the medical device, pharmaceutical, food safety and advanced applications markets using three major technologies: gamma irradiation, EO processing and E-beam irradiation.
Nordion
Nordion is a leading global provider of Co-60 used in the sterilization and irradiation processes for the medical device, pharmaceutical, food safety, and high-performance materials industries, as well as in the treatment
of cancer. In addition, Nordion is a leading global provider of gamma irradiation systems.
As a result of the time required to meet regulatory and logistics requirements for delivery of radioactive products, combined with accommodations made to our customers to minimize disruptions to their operations during the installation of Co-60, Nordion sales patterns can often vary significantly from one quarter to the next. However, timing-related impacts on our sales performance tend to be resolved within several quarters, resulting in more consistent performance over longer periods of time. In addition, sales of gamma irradiation systems occur infrequently and tend to be for larger amounts.
Results for our Nordion segment are also impacted by Co-60 mix, harvest schedules, as well as customer, product and service mix.
Nelson Labs
Our
Nelson Labs business provides outsourced microbiological and analytical chemistry testing and advisory services for the medical device and pharmaceutical industries.
For more information regarding our reportable segments please refer to Note 17, “Segment Information” to our consolidated financial statements.
The following tables compare segment net revenue and segment income for the three months ended June 30, 2023 to the three months ended June 30, 2022:
Three
Months Ended June 30,
(thousands of U.S. dollars)
2023
2022
$ Change
% Change
Net Revenues
Sterigenics
$
166,590
$
157,792
$
8,798
5.6
%
Nordion
31,975
50,478
(18,503)
(36.7
%)
Nelson
Labs
56,717
58,369
(1,652)
(2.8)
%
Segment Income
Sterigenics
$
91,450
$
85,098
$
6,352
7.5
%
Nordion
17,784
29,982
(12,198)
(40.7)
%
Nelson
Labs
19,251
21,055
(1,804)
(8.6)
%
Segment Income margin
Sterigenics
54.9
%
53.9
%
Nordion
55.6
%
59.4
%
Nelson
Labs
33.9
%
36.1
%
41
Net Revenues by Segment
Sterigenics net revenues were $166.6 million for the three months ended June 30, 2023, an increase of $8.8 million, or 5.6%, as compared to the three months ended June 30, 2022. The increase reflects favorable
impacts from pricing of 6.7% as well as favorable changes in foreign currency exchange rates. The increase in segment revenue was partially offset by an unfavorable impact from volume and change in mix compared to the same period in the prior year.
Nordion net revenues were $32.0 million for the three months ended June 30, 2023, a decrease of $18.5 million, or 36.7%, as compared to the three months ended June 30, 2022. The decrease was driven by an expected volume decline and change in mix of 38.8%, due mainly to Co-60 harvest schedule timing, and an unfavorable impact of 3.6% from changes in foreign currency exchange rates. Partially offsetting this decrease was a favorable impact from pricing of 5.7%.
Nelson Labs net revenues were $56.7 million for the three months ended June 30,
2023, a decrease of $1.7 million, or 2.8%, as compared to the three months ended June 30, 2022. The decrease was attributable to volume decline and change in mix of 6.9%. Partially offsetting this decline was a favorable impact from pricing and foreign currency exchange rates of 3.6% and 0.5%, respectively.
Segment Income
Sterigenics segment income was $91.5 million for the three months ended June 30, 2023, an increase of $6.4 million, or 7.5%, as compared to the three months ended June 30, 2022. The increase in segment income and segment income margin was primarily a result of favorable customer pricing, partially offset by unfavorable volume and change in mix, as well as inflation.
Nordion
segment income was $17.8 million for the three months ended June 30, 2023, a decrease of $12.2 million, or 40.7%, as compared to the three months ended June 30, 2022. The decrease in segment income and segment income margin was driven by expected volume decline and change in mix stemming from Co-60 harvest schedule timing, partially offset by favorable pricing.
Nelson Labs segment income was $19.3 million for the three months ended June 30, 2023, a decrease of $1.8 million, or 8.6%, as compared to the three months ended June 30, 2022. The decrease in segment income and segment income margin was primarily a result of volume decline and change in mix as well as inflation, partially offset by favorable pricing, as referenced above.
The following tables compare segment net revenue and segment income for the six months ended June 30, 2023 to the six months ended June 30, 2022:
Six
Months Ended June 30,
(thousands of U.S. dollars)
2023
2022
$ Change
% Change
Net Revenues
Sterigenics
$
326,587
$
307,254
$
19,333
6.3
%
Nordion
40,526
84,480
(43,954)
(52.0
%)
Nelson
Labs
108,759
111,659
(2,900)
(2.6)
%
Segment Income
Sterigenics
$
174,290
$
164,501
$
9,789
6.0
%
Nordion
19,310
48,885
(29,575)
(60.5)
%
Nelson
Labs
33,353
38,098
(4,745)
(12.5)
%
Segment Income margin
Sterigenics
53.4
%
53.5
%
Nordion
47.6
%
57.9
%
Nelson
Labs
30.7
%
34.1
%
42
Net Revenues by Segment
Sterigenics net revenues were $326.6 million for the six months ended June 30, 2023, an increase of $19.3 million, or 6.3%, as compared to the six months ended June 30, 2022. The increase was primarily attributable
to the favorable impacts from pricing of 6.4%, partially offset by unfavorable impacts from changes in foreign currency exchange rates of 0.2%.
Nordion net revenues were $40.5 million for the six months ended June 30, 2023, a decrease of $44.0 million, or 52.0%, as compared to the six months ended June 30, 2022. The decrease was driven by an expected volume decline and change in mix of 51.6% due to Co-60 harvest schedule timing, and an unfavorable impact of 3.8% from changes in foreign exchange rates. Partially offsetting this decrease was a favorable impact from pricing of 3.4%.
Nelson Labs net revenues were $108.8 million for the six months ended June 30, 2023, a decrease of $2.9 million, or 2.6%, as compared to the six months
ended June 30, 2022. The decrease was attributable to volume decline and change in mix of 6.2% coupled with a 0.2% impact from changes in foreign currency exchanges rates. Partially offsetting this decline was a favorable impact from pricing of 3.8%.
Segment Income
Sterigenics segment income was $174.3 million for the six months ended June 30, 2023, an increase of $9.8 million, or 6.0%, as compared to the six months ended June 30, 2022. The increase in segment income was fueled mainly by favorable customer pricing, as referenced above, partially offset by unfavorable volume and change in mix, as well as inflation.
Nordion segment income was $19.3 million for the six months ended June 30,
2023, a decrease of $29.6 million, or 60.5%, as compared to the six months ended June 30, 2022. The decrease in segment income and segment income margin was driven by expected volume decline and change in mix stemming from Co-60 harvest schedule timing, as referenced above.
Nelson Labs segment income was $33.4 million for the six months ended June 30, 2023, a decrease of $4.7 million, or 12.5%, as compared to the six months ended June 30, 2022. The decrease in segment income and segment income margin was primarily a result of volume decline and change in mix as well as inflation, partially offset by favorable pricing, as referenced above.
NON-GAAP
FINANCIAL MEASURES
To supplement our consolidated financial statements presented in accordance with GAAP, we consider Adjusted Net Income and Adjusted EBITDA, financial measures that are not based on any standardized methodology prescribed by GAAP.
We define Adjusted Net Income as net income before amortization and certain other adjustments that we do not consider in our evaluation of our ongoing operating performance from period to period as discussed further below. We define Adjusted EBITDA as Adjusted Net Income before interest expense, depreciation (including depreciation of Co-60 used in our operations) and income tax provision applicable to Adjusted Net Income.
We use Adjusted Net Income and Adjusted EBITDA, non-GAAP financial measures, as the principal measures of our operating performance. Management believes Adjusted Net Income
and Adjusted EBITDA are useful because they allow management to more effectively evaluate our operating performance and compare the results of our operations from period to period without the impact of certain non-cash items and non-routine items that we do not expect to continue at the same level in the future and other items that are not core to our operations. We believe that these measures are useful to our investors because they provide a more complete understanding of the factors and trends affecting our business than could be obtained absent this disclosure. In addition, we believe Adjusted Net Income and Adjusted EBITDA will assist investors in making comparisons to our historical operating results and analyzing the underlying performance of our operations for the periods presented. Our management also uses Adjusted Net Income and Adjusted EBITDA in their financial analysis and operational decision-making, and Adjusted EBITDA serves as the basis for the metric
we utilize to determine attainment of our primary annual incentive program. Adjusted Net Income and Adjusted EBITDA may be calculated differently from, and therefore may not be comparable to, a similarly titled measure used by other companies.
Adjusted Net Income and Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. There are a number of limitations related to the use of Adjusted Net Income
43
and Adjusted EBITDA rather than net income, the nearest GAAP equivalent. For example, Adjusted Net Income and Adjusted EBITDA primarily exclude:
•certain recurring non-cash charges
such as depreciation of fixed assets, although these assets may have to be replaced in the future, as well as amortization of acquired intangible assets and asset retirement obligations;
•costs of acquiring and integrating businesses, which will continue to be a part of our growth strategy;
•non-cash gains or losses from fluctuations in foreign currency exchange rates and the mark-to-fair value of derivatives not designated as hedging instruments, which includes the embedded derivatives relating to certain customer and supply contracts at Nordion;
•impairment charges on long-lived assets, intangible assets and investments accounted for under the equity method;
•loss
on extinguishment of debt incurred in connection with refinancing or early extinguishment of long-term debt;
•expenses and charges related to the litigation, settlement agreements, and other activities associated with our EO sterilization facilities, including those in Willowbrook, Illinois, Atlanta, Georgia and Santa Teresa, New Mexico, even though that litigation remains ongoing;
•in the case of Adjusted EBITDA, interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness; and
•share-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense and an important part of our compensation strategy.
In evaluating
Adjusted Net Income and Adjusted EBITDA, you should be aware that in the future, we will incur expenses similar to the adjustments in the table below. Our presentations of Adjusted Net Income and Adjusted EBITDA should not be construed as suggesting that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider Adjusted Net Income and Adjusted EBITDA alongside other financial performance measures, including our net income and other GAAP measures.
The following table presents a reconciliation of net income, the most directly comparable financial measure calculated and presented in accordance with GAAP to Adjusted Net Income and Adjusted EBITDA, for each of the periods indicated:
Three
Months Ended June 30,
Six Months Ended June 30,
(thousands of U.S. dollars)
2023
2022
2023
2022
Net income
$
23,513
$
30,418
$
26,355
$
61,059
Amortization
of intangibles
20,502
21,195
41,109
41,377
Share-based compensation(a)
8,409
5,801
15,757
10,339
Loss
(gain) on foreign currency and derivatives not designated as hedging instruments, net(b)
(409)
(1,430)
126
(7,982)
Acquisition and divestiture related charges, net(c)
153
691
745
531
Business
optimization project expenses(d)
3,322
470
5,856
574
Plant closure expenses(e)
129
478
(766)
1,149
Impairment
of investment in unconsolidated affiliate(f)
—
9,613
—
9,613
Professional services and other expenses relating to EO sterilization facilities(g)
17,080
17,678
33,382
35,737
Accretion
of asset retirement obligations(h)
555
598
1,127
1,118
COVID-19 expenses(i)
—
45
—
148
Income
tax benefit associated with pre-tax adjustments(j)
(13,959)
(9,732)
(26,351)
(17,584)
Adjusted Net Income
59,295
75,825
97,340
136,079
Interest
expense, net(k)
25,271
17,144
51,811
33,894
Depreciation(l)
18,988
15,744
37,919
31,611
Income
tax provision applicable to Adjusted Net Income(m)
24,931
27,422
39,883
49,900
Adjusted EBITDA(n)
$
128,485
$
136,135
$
226,953
$
251,484
44
(a) Represents
share-based compensation expense to employees and non-employee directors.
(b) Represents the effects of (i) fluctuations in foreign currency exchange rates, (ii) non-cash mark-to-fair value of embedded derivatives relating to certain customer and supply contracts at Nordion, and (iii) unrealized gains on interest rate caps not designated as hedging instruments.
(c) Represents (i) certain direct and incremental costs related to the acquisitions of RCA and BioScience Labs and certain related integration efforts as a result of those acquisitions, (ii) the earnings impact of fair value adjustments (excluding those recognized within amortization expense) resulting from the businesses acquired, and (iii) transition services income and non-cash deferred lease income associated with the terms
of the divestiture of the Medical Isotopes business in 2018.
(d) Represents professional fees, exit costs, severance and other payroll costs, and other costs associated with business optimization and cost savings projects relating to the integration of acquisitions, operating structure realignment and other process enhancement projects.
(e) Represents professional fees, severance and other payroll costs, and other costs including ongoing lease and utility expenses associated with the closure of the Willowbrook, Illinois facility. The six months ended June 30, 2023 also includes a $1.0 million cancellation fee received from a tenant in connection with the termination of an office space lease at the Nordion facility.
(f) Represents an impairment charge on our equity method investment
in a joint venture. Refer to Note 1, “Basis of Presentation”.
(g) Represents litigation and other professional fees associated with our EO sterilization facilities. This includes $5.5 million and $7.8 million of interest expense, net for the three and six months ended June 30, 2023, respectively, associated with Term Loan B that was issued to finance the $408.0 million cost to settle approximately 880 pending and threatened EO claims against the Settling Defendants in Illinois under Settlement Agreements entered into on March 28, 2023. See Note 15, “Commitments and Contingencies.”
(h) Represents non-cash accretion of asset retirement obligations related to Co-60 and gamma processing facilities, which are based on estimated site remediation
costs for any future decommissioning of these facilities (without regard for whether the decommissioning services would be performed by employees of Nordion, instead of by a third party) and are accreted over the life of the asset.
(i) Represents non-recurring costs associated with the COVID-19 pandemic, including incremental costs to implement workplace health and safety measures.
(j) Represents the income tax impact of adjustments calculated based on the tax rate applicable to each item. We eliminate the effect of tax rate changes as applied to tax assets and liabilities and unusual items from our presentation of adjusted net income.
(k) The three and six months ended June 30, 2023 exclude $5.5 million and $7.8 million, respectively, of interest expense,
net, on Term Loan B attributable to the loan proceeds that were used to fund the $408.0 million Illinois EO litigation settlement. The three and six months ended June 30, 2022 exclude $3.1 million and $9.4 million, respectively, of unrealized gains on interest rate derivatives not designated as hedging instruments.
(l) Includes depreciation of Co-60 held at gamma irradiation sites.
(m) Represents the difference between the income tax provision as determined under U.S. GAAP and the income tax provision or benefit associated with pre-tax adjustments described in footnote (j).
(n) $24.4 million and $20.9 million of the adjustments for the three months ended June 30, 2023 and 2022,
respectively, and $47.2 million and $40.7 million of the adjustments for the six months ended June 30, 2023 and 2022, respectively, are included in cost of revenues, primarily consisting of amortization of intangible assets, depreciation, and accretion of asset retirement obligations.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Cash
The primary sources of liquidity for our business are cash flows from operations and borrowings under our credit facilities. As of June 30, 2023, we had $270.5 million of cash and cash equivalents. This is a decrease of $125.8 million from the
balance at December 31, 2022. The decrease in cash and cash equivalents was mainly attributable to the release of approximately $408.0 million to settle the EO claims against the Settling Defendants in Cook County, Illinois and a $200.0 million paydown of the outstanding balance on the Revolving Credit Facility. Partially offsetting this decrease was $500.0 million in proceeds from the issuance of Term Loan B on February 23, 2023. Our foreign subsidiaries held cash of approximately $152.8 million at June 30,
45
2023 and $158.3 million at December 31,
2022, to meet their liquidity needs. No material restrictions exist to accessing cash held by our foreign subsidiaries notwithstanding any potential tax consequences.
On February 23, 2023, we entered into the First Lien Credit Agreement (the “2023 Credit Agreement”), which provides for, among other things, a new Term Loan B facility in an aggregate principal amount of $500.0 million and bears interest, at the Company’s option, at a variable rate per annum equal to either (x) the Term SOFR Rate (as defined in the 2023 Credit Agreement) plus an applicable margin of 3.75% or (y) an alternative base rate (“ABR”) plus an applicable margin of 2.75%. The 2023 Credit Agreement is secured
on a first priority basis on substantially all of our assets and is guaranteed by certain of our subsidiaries. It is prepayable without premium or penalty at any time six months after the closing date. The principal balance shall be paid at 1% of the aggregate principal amount ($5.0 million) per year, with the balance due at the end of 2026. The Company used the proceeds of this debt to fund a previously announced $408.0 million EO litigation settlement in Cook County, Illinois on May 1, 2023 and pay down existing borrowings under the Company’s revolving credit facility. In addition, the
Company plans to use the remaining proceeds to further enhance liquidity and for general corporate purposes.
Uses of Cash
We expect that cash on hand, operating cash flows and amounts available under our credit facilities will provide sufficient working capital to operate our business, meet foreseeable liquidity requirements, including debt service on our long-term debt, make expected capital expenditures including investments in fixed assets to build and/or expand existing facilities, and meet litigation costs that we expect to continue to incur for at least the next twelve months. Our primary long-term liquidity requirements beyond the next 12 months will be to service our debt, make capital expenditures, and fund suitable business acquisitions. As of June 30, 2023, there were no outstanding
borrowings on the Revolving Credit Facility. We expect any excess cash provided by operations will be allocated to fund capital expenditures, potential acquisitions, or for other general corporate purposes. Our ability to meet future working capital, capital expenditures and debt service requirements will depend on our future financial performance, which will be affected by a range of macroeconomic, competitive and business factors, including interest rate changes and changes in our industry, many of which are outside of our control. As of June 30, 2023, our interest rate caps and swap limit our cash flow exposure of our variable rate borrowings under the Term Loans. Refer to Note 16, “Financial Instruments and Financial Risk”, “Derivative Instruments” for additional information regarding the interest rate caps used to manage economic risks associated with our variable
rate borrowings.
Capital Expenditures
Our capital expenditure program is a component of our long-term strategy. This program includes, among other things, investments in new and existing facilities, business expansion projects, Co-60 used by Sterigenics at its gamma irradiation facilities, cobalt development projects and information technology enhancements. During the six months ended June 30, 2023, our capital expenditures amounted to $98.1 million, compared to $71.6 million for the six months ended June 30, 2022.
Effect of foreign currency exchange rate changes on cash and cash equivalents
1,796
(2,287)
Net increase (decrease) in cash and cash equivalents, including restricted cash
$
(125,804)
$
33,694
Operating
activities
Cash flows from operating activities decreased $411.0 million to net cash used of $302.7 million in the six months ended June 30, 2023 compared to $108.3 million provided by operating activities for the six months ended June 30, 2022. The decrease in cash flows from operating activities in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to the release of the settlement funds of approximately $408.0 million on June 30, 2023 in connection with the settlements of the EO claims in Cook County, Illinois.
46
Investing
activities
Cash used by investing activities increased $26.9 million to net cash used of $98.1 million in the six months ended June 30, 2023 compared to $71.2 million for the six months ended June 30, 2023. The variance was primarily driven by an increase in capital expenditures of $26.5 million in the six months ended June 30, 2023 compared to the six months ended June 30, 2022.
Financing activities
Cash provided by financing activities increased $274.3 million to net cash provided of $273.2 million for the six months ended June 30, 2023 compared to $1.1 million of cash used for financing
activities for the six months ended June 30, 2022. The difference was mainly attributable to $500.0 million in proceeds from the issuance of Term Loan B on February 23, 2023, partially offset by the $200.0 million paydown of the outstanding balance on the revolving credit facility and the payment of $24.7 million of debt issuance costs incurred in connection with the issuance of Term Loan B and the revolving credit facility amendment during the six months ended June 30, 2023, as described in “Debt Facilities” below. Financing activities for the three months ended June 30, 2022 were insignificant.
Debt Facilities
Senior Secured Credit Facilities
On
December 13, 2019, Sotera Health Holdings, LLC (“SHH”), our wholly owned subsidiary, entered into senior secured first lien credit facilities (the “Senior Secured Credit Facilities”), consisting of both a prepayable senior secured first lien term loan (the “Term Loan”) and a senior secured first lien revolving credit facility (the “Revolving Credit Facility”) pursuant to a first lien credit agreement (the “Credit Agreement”). The Revolving Credit Facility and Term Loan mature on June 13, 2026 and December 13, 2026, respectively. After giving effect to the Revolving Credit Facility Amendment (defined below), the total borrowing capacity under the Revolving Credit Facility is $423.8 million. The Senior Secured Credit Facilities also provide SHH the right at any time and under certain conditions
to request incremental term loans or incremental revolving credit commitments based on a formula defined in the Senior Secured Credit Facilities. As of June 30, 2023 and December 31, 2022, total borrowings under the Term Loan were $1,763.1 million. The weighted average interest rate on borrowings under the Term Loan for the three months ended June 30, 2023 and June 30, 2022 was 7.89% and 3.53%, respectively, and 7.66% and 3.39% for the six months ended June 30, 2023 and June 30, 2022, respectively.
On February 23, 2023, we entered into the First Lien Credit Agreement (the “2023
Credit Agreement”), which provides for, among other things, a new Term Loan B facility in an aggregate principal amount of $500.0 million and bears interest, at the Company’s option, at a variable rate per annum equal to either (x) the Term SOFR Rate (as defined in the 2023 Credit Agreement) plus an applicable margin of 3.75% or (y) an alternative base rate (“ABR”) plus an applicable margin of 2.75%. The 2023 Credit Agreement is secured on a first priority basis on substantially all of our assets and is guaranteed by certain of our subsidiaries. It is prepayable without premium or penalty at any time six months after the closing date. The principal balance shall be paid at 1% of the aggregate principal amount ($5.0 million) per year, with the balance due at the end of 2026. The
Company used the proceeds of this debt to fund a previously announced $408.0 million EO litigation settlement in Cook County, Illinois and pay down the $200.0 million of existing borrowings under the Revolving Credit Facility concurrent with the funding of this loan on February 23, 2023. In addition, the Company plans to use the remaining proceeds to further enhance liquidity and for general corporate purposes. The weighted average interest rate on borrowings under Term Loan B for the three months ended June 30, 2023 was 8.82%.
On March 21, 2023, the Company entered into the Revolving
Credit Facility Amendment, which provides for an increase in the commitments under the existing Revolving Credit Facility in an aggregate principal amount of $76.3 million. In addition, certain of the lenders providing revolving credit commitments have provided additional commitments for the issuance of the letters of credit under the Revolving Credit Facility in an aggregate principal amount of $165.1 million. The Revolving Credit Facility Amendment also provides for the replacement of the LIBOR-based reference interest rate option for revolving loans with a reference rate option based upon the Term Secured Overnight Financing Rate (“Term SOFR”) or Daily Simple SOFR (“Daily SOFR”) plus an applicable credit spread adjustment of 0.1% (subject to a minimum floor of 0.0%). After giving effect to the Revolving Credit Facility Amendment, the aggregate amount of the Lenders' revolving commitments is $423.8 million and the aggregate amount of letter of credit
commitments is $361.3 million. Letter of credit commitments are part of and not in addition to the aggregate revolving commitments. The maturity date of the Revolving Credit Facility remains June 13, 2026. As of June 30, 2023 there were no borrowings outstanding on the Revolving Credit Facility. The Company borrowed $200.0 million on the Revolving Credit Facility during the fourth quarter of 2022, which was repaid in the first quarter of 2023, as noted above.
47
The Senior Secured Credit Facilities and 2023 Credit Agreement contain additional covenants that, among other things, restrict,
subject to certain exceptions, our ability and the ability of our restricted subsidiaries to engage in certain activities, such as incur indebtedness or permit to exist any lien on any property or asset now owned or hereafter acquired, as specified in the Senior Secured Credit Facilities and 2023 Credit Agreement. The Senior Secured Credit Facilities and 2023 Credit Agreement also contain certain customary affirmative covenants and events of default, including upon a change of control. An event of default under the Senior Secured Credit Facilities and 2023 Credit Agreement would occur if the Company or certain of its subsidiaries received one or more enforceable judgments for payment in an aggregate amount
in excess of $100.0 million, which judgment or judgments are not stayed or remain undischarged for a period of 60 consecutive days or if, in order to enforce such a judgment, a judgment creditor attached or levied upon assets that are material to the business and operations, taken as a whole, of the Company and certain of its subsidiaries. As of June 30, 2023, we were in compliance with all the Senior Secured Credit Facilities and 2023 Credit Agreement covenants.
All of SHH’s obligations under the Senior Secured Credit Facilities and 2023 Credit Agreement are unconditionally guaranteed by the Company and each existing
and subsequently acquired or organized direct or indirect wholly-owned domestic restricted subsidiary of the Company, with customary exceptions including, among other things, where providing such guarantees is not permitted by law, regulation or contract or would result in material adverse tax consequences. All obligations under the Senior Secured Credit Facilities and 2023 Credit Agreement, and the guarantees of such obligations, are secured by substantially all assets of the borrower and guarantors, subject to permitted liens and other exceptions and exclusions, as outlined in the Senior Secured Credit Facilities and 2023 Credit Agreement.
Outstanding letters of credit are collateralized by encumbrances against the Revolving Credit Facility and
the collateral pledged thereunder, or by cash placed on deposit with the issuing bank. As of June 30, 2023, the Company had $51.7 million of letters of credit issued against the Revolving Credit Facility, resulting in total availability under the Revolving Credit Facility of $372.1 million.
Term Loan Interest Rate Risk Management
The Company utilizes interest rate derivatives to reduce the variability of cash flows in the interest payments associated with our variable rate debt due to changes in LIBOR (up to June 22, 2023) and SOFR. For additional information on the derivative instruments described above, refer
to Note 16, “Financial Instruments and Financial Risk”, “Derivatives Instruments.”
LIBOR Transition
Publication of all U.S. LIBOR tenors ceased after June 30, 2023. To align with the market phaseout of LIBOR, SHH entered into an amendment to the Senior Secured Credit Facilities to replaces the LIBOR-based reference interest rate option under the Term Loan with a reference interest rate option based on Term SOFR plus an applicable credit spread adjustment of 0.11448% (for one-month interest periods), 0.26161% (for three-month interest periods) and 0.42826% (for six-month interest periods) (in all cases, subject to a minimum floor of 0.50%).
In accordance with ASC 848 Reference Rate Reform, we have elected
to apply certain optional expedients for contract modifications and hedging relationships for derivative instruments impacted by the benchmark interest rate transition. The optional expedients remove the requirement to remeasure contract modifications or dedesignate hedging relationships impacted by reference rate reform.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements and related disclosures in conformity with GAAP requires management to make judgments, estimates and assumptions at a specific point in time and in certain circumstances
that affect amounts reported in the accompanying consolidated financial statements. In preparing these consolidated financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality. The application of accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.
A comprehensive discussion of the Company’s critical accounting policies and management estimates made in connection with the preparation of the financial statements is included in Item 7 of 2022 Form 10-K. There have been no significant changes in critical accounting policies, management estimates or accounting policies since the year ended December 31, 2022.
48
NEW ACCOUNTING PRONOUNCEMENTS
For a description of recent accounting pronouncements applicable to our business, see Note 2, “Recent Accounting Standards” to our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risks are described within “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our 2022
Form 10-K. These market risks have not materially changed for the three and six months ended June 30, 2023.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of the Company’s “disclosure controls and procedures,” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)). Based upon their evaluation, the CEO and CFO concluded
that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”), and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control
During the three and six months ended June 30, 2023, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
49
Part II—OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may be subject to various legal proceedings arising in the ordinary course of our business, including claims relating to personal injury, property damage, workers’ compensation, employee safety and our disclosures as a Nasdaq-listed, publicly-traded company. In addition, from time to time, we receive communications from government or regulatory
agencies concerning investigations or allegations of noncompliance with laws or regulations in jurisdictions in which we operate. At this time, and except as is noted herein, we are unable to predict the outcome of, and cannot reasonably estimate the impact of, any pending litigation matters, matters concerning allegations of non-compliance with laws or regulations and matters concerning other allegations of other improprieties, or the incidence of any such matters in the future. Information regarding our material legal proceedings is included below.
Legal Proceedings Described in Note 15 “Commitments and Contingencies”of Our Consolidated Financial Statements
Note 15, “Commitments and Contingencies” to our consolidated financial statements for the three and six months ended June 30,
2023 contained in this Quarterly Report on Form 10-Q includes information on legal proceedings that constitute material contingencies for financial reporting purposes that could have a material effect on our financial condition or results of operations. This item should be read in conjunction with Note 15“Commitments and Contingencies” for information regarding the following legal proceedings, which information is incorporated into this item by reference:
•Ethylene Oxide Tort Litigation – Illinois, Georgia and New Mexico;
•Insurance Coverage for Environmental Liabilities; and
•Sotera Health Company Securities Litigation and Related Matters.
Legal Proceedings That
Are Not Described in Note 15 “Commitments and Contingencies” to Our Consolidated Financial Statements
In addition to the matters that are identified in Note 15 “Commitments and Contingencies” to our consolidated financial statements for the three and six months ended June 30, 2023 contained in this Quarterly Report on Form 10-Q, and incorporated into this item by reference, the following matter also constitutes a pending legal proceeding, other than ordinary course litigation incidental to our business, to which we are or any of our subsidiaries is a party.
Zoetermeer, Holland Criminal Proceedings and Criminal Financial Investigation
In 2010, the Dutch Public Prosecution Service started
criminal proceedings against our subsidiary DEROSS Holding B.V. (“DEROSS”), in relation to alleged environmental permit violations for EO emissions in the period from 2004 to 2009 at its Zoetermeer processing facility. We agreed to defend and indemnify the two individuals overseeing environmental compliance during the time period of the alleged claims by the Public Prosecutor. In November 2010, the Public Prosecution Service also started a criminal financial investigation against DEROSS to determine whether it obtained illegal advantages by committing the alleged criminal offenses noted above.
In February 2018, DEROSS and the two individuals received favorable judgments from the trial court, which did not hold any of them responsible for the alleged criminal offenses. In March 2018, the Public Prosecutor filed an appeal against the favorable judgments. In May 2023, the Public Prosecutor agreed to a resolution of the
proceedings against DEROSS and the two individuals. Pursuant to this agreed resolution, the Public Prosecutor has withdrawn the appeals against the 2018 judgments in the cases of the two individuals. In addition, the Public Prosecutor has agreed to terminate the proceedings against DEROSS on the condition that DEROSS fulfills its obligations under the agreed resolution, including a contribution of €990,000 to a charity. The resolution of proceedings against DEROSS is further conditioned on approval by the Dutch courts.
An escrow was established in 2011 to satisfy indemnity claims for losses related to this matter. The balance of special escrow funds as of June 30, 2023, was approximately US$1.8 million and the cash collateral held by ABN Amro to provide security for the claims against us was approximately €2.4 million (US$2.6 million) as of June 30,
2023. At this time, there can be no assurance that the agreed resolution of this matter will be completed. If resolution is unsuccessful, we expect that the appeal of this matter could take several years to resolve; however, we believe the indemnification receivable continues to be recoverable and plan to ensure escrow funds remain in place to cover the agreed resolution described above or outcomes of an appeal.
While we have received letters in past years from a small number of individuals claiming to live or work in the vicinity of the Zoetermeer facility, no civil claims have been filed against DEROSS or us. It is possible that these or other individuals living in
50
the vicinity of the Zoetermeer facility may file civil
claims at some time in the future. We have not provided for a contingency reserve in connection with any civil claims as we are unable to determine the probability of an unfavorable outcome and no reasonable estimate of a loss or range of losses, if any, can be made.
Notice of Violation for Ethylene Oxide Emissions from Our Facility in Queensbury, New York
In late May 2023, Sterigenics’ Queensbury, NY facility experienced a power outage that resulted in a failure to restart the facility’s scrubber system, which is part of the facility’s emission control systems. The disruption of the facility’s scrubber lasted for approximately 48 hours. Upon discovering the disruption, the facility restarted the scrubber to control emissions within the system and then ceased operations. Operating without the scrubber resulted in nine intermittent releases of
ethylene oxide over a period of 48 hours from the 78-foot stack at the facility.
Sterigenics promptly notified the New York State Department of Environmental Conservation (“DEC”) and the US Environmental Protection Agency (“US EPA”) about the failure of the scrubber system and resulting releases of ethylene oxide. Sterigenics implemented remedial measures to prevent a recurrence in the event of future power outages and, with the DEC’s approval, resumed operations at the Queensbury facility 12 days after ceasing operations. Sterigenics received a Notice of Violation from the DEC on May 30, 2023 and expects to be fined in an amount to be determined by the DEC.
Item 1A. Risk Factors.
The risk factor titled “We are subject to extensive regulatory requirements and routine regulatory audits in our operations. …” included in Part I, Item 1A, “Risk Factors” of our 2022 Form 10-K for the year ended December 31, 2022, as amended by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, is hereby updated by deleting the final paragraph thereof and substituting the paragraph immediately below in its place. Other than such substitution, the text of the risk factor is unchanged.
In April 2023, the US EPA proposed stricter EO regulations based on the 2016 IRIS Assessment, including (1) a proposed interim decision under FIFRA that sets forth measures designed to mitigate EO exposure, in particular for workers exposed
to EO in occupational settings, and (2) proposed amendments to the NESHAP governing commercial EO sterilization facilities like ours that would require these facilities to implement additional air pollution control technologies, practices and procedures designed to further reduce EO emissions from EO facilities. These April 2023 proposals contain a number of proposed requirements that are inconsistent with existing industry practices and set forth proposed implementation timelines that would be difficult to meet at existing facilities for some of the proposed requirements. The public comment period on these proposals closed in late June 2023, with thousands of comments received by the US EPA, which may lead to clarifications and revisions in the final US EPA regulations. Although we have been implementing enhancements at our EO sterilization facilities in the United States that we expect will facilitate our ability to meet many of the proposed requirements, certain facets
of the proposed requirements are untested or not widely adopted at existing EO sterilization facilities. Compliance with the proposals in the form proposed in April 2023 will require additional facility modifications as well as added capital and operational costs, and some requirements (if adopted as proposed) could be unachievable at our EO facilities and at existing EO facilities throughout the industry. The US EPA has stated it plans to adopt final requirements by the first half of 2024 and its April 2023 proposals contemplate that existing facilities will be required to comply with many of the requirements as soon as 18 months following adoption.
Item 5. Other Information.
Rule 10b5-1 Trading Plans
During
the three months ended June 30, 2023, none of the Company’s directors or executive officers iiadopted/ or iiterminated/
any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement” (as those terms are defined in Regulation S-K, Item 408).
Inline XBRL Instance
Document - The XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
