Sotera Health Co: Form 10-Q for the period ended Sep 30, 2023

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 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 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 nine months ended September 30, 2023, respectively, we recorded net revenues of $263.2 million and $739.0 million, net loss of $13.7 million and net income of $12.7 million, Adjusted Net Income of $58.6 million and $156.0 million, and Adjusted EBITDA of $134.3 million and $361.3 million. For the definition of Adjusted Net Income and Adjusted EBITDA and the reconciliation of these non-GAAP measures from net income (loss), 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 have impacted our operating results for the three and nine months ended September 30, 2023 and may continue to affect our performance and financial condition in future periods.

• Business and market conditions. Consolidated revenue and total segment income for the three months ended September 30, 2023 increased compared to the three months ended September 30, 2022, which was primarily a result of favorable pricing across all three business units and timing of Nordion’s Co-60 harvest volume and shipments, in alignment with management’s expectations. However, year-to-date volume contraction and an unfavorable business mix at Nelson Labs and Sterigenics resulted in a decline in consolidated net revenues and total segment income for the nine months ended September 30, 2023 compared to the same period in the prior year.

As discussed in more detail in our 2022 10-K, a portion of our supply of Co-60 is generated by Russian nuclear

reactors. We continue to monitor the potential for future disruption in the supply of Co-60 from Russian nuclear reactors.

• Investment initiatives. We continue to advance our growth-related investments including our three active capacity expansion projects within the Sterigenics segment and Co-60 development projects in the Nordion segment. In addition, Nelson Labs has progressed with expansion efforts to support pharma testing services alongside enhancements to the lab information management system. For the nine months ended September 30, 2023, capital expenditures increased by $39.5 million compared to the nine months ended September 30, 2022.
• Disciplined and strategic M&A activity. We remain committed to our highly disciplined acquisition strategy and continue to seek suitable acquisition targets.
• Litigation costs. We are currently the subject of tort lawsuits alleging personal injury by purported exposure to EO emitted by our current facilities in Atlanta, Georgia and Santa Teresa, New Mexico and our former facility in Willowbrook, Illinois. 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 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 $18.5 million and $51.9 million for the three and nine months ended September 30, 2023, respectively.

With respect to the litigation related to our Atlanta, Georgia facility, on October 16, 2023, Sterigenics and Sotera Health LLC (the “Settling Defendants”) entered a binding term sheet to resolve 79 EO claims against the Settling Defendants in Georgia (the “October 2023 Term Sheet”), including a case that was scheduled to begin trial in the State Court of Gwinnett County on October 23, 2023. Pursuant to the October 2023 Term Sheet, Sterigenics will pay $35 million and the settling plaintiffs’ claims will be dismissed with prejudice.

The settlement is subject to 100% of the plaintiffs consenting to their respective settlement payment allocations and to a stay of the trial that was scheduled to begin on October 23, 2023. Sterigenics has the right to waive the 100% participation requirement, in which case the settlement would be binding on only those plaintiffs who opted into the settlement. The Company denies any liability and the October 2023 Term Sheet explicitly provides that the settlement is not to be construed as an admission of any liability or that emissions from Sterigenics’ Atlanta facility have ever posed any safety hazard to the surrounding communities.

With respect to the litigation related to our former Willowbrook, Illinois facility, on January 9, 2023, 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 Settling Defendants in the Circuit Court of Cook County, Illinois, and U.S. District Court for the Northern District of Illinois (the “Willowbrook Settlement” and “Willowbrook Settlement Agreements”). On May 1, 2023, pursuant to the Willowbrook 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 (the “Settling Claimants”). 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 if these claimants do not opt in before December 31, 2023.

The Willowbrook 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, 2023 the 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.

CONSOLIDATED RESULTS OF OPERATIONS

Three Months Ended September 30, 2023 as compared to Three Months Ended September 30, 2022

The following table sets forth the components of our results of operations for the three months ended September 30, 2023 and 2022.

(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 (loss), 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 September 30, 2023 to the three months ended September 30, 2022.

Net revenues were $263.2 million in the three months ended September 30, 2023, an increase of $14.5 million, or 5.8%, as compared with the three months ended September 30, 2022. Excluding the impact of foreign currency exchange rates, net revenues in the three months ended September 30, 2023 increased approximately 4.3% compared with the three months ended September 30, 2022.

Service revenues

Service revenues increased $10.4 million, or 4.8%, to $227.1 million in the three months ended September 30, 2023 as compared to $216.7 million in the three months ended September 30, 2022. The increase in net service revenue was driven by favorable pricing of $9.9 million and $2.3 million in the Sterigenics and Nelson Labs segments, respectively, coupled with a $4.4 million favorable impact from changes in foreign currency exchange rates across all segments. These growth factors were partially offset by unfavorable service revenue volume and mix of $6.3 million primarily in the Nelson Labs and Sterigenics segments.

Product revenues

Product revenues increased $4.1 million, or 12.7%, to $36.1 million in the three months ended September 30, 2023 as compared to $32.0 million in the three months ended September 30, 2022. The increase in product revenues was attributable to favorable pricing of $3.2 million and volume and mix of $1.5 million, partially offset by a $0.6 million unfavorable impact from changes in foreign currency exchange rates.

Total Cost of Revenues

The following table compares our cost of revenues by type for the three months ended September 30, 2023 to the three months ended September 30, 2022.

Total cost of revenues accounted for approximately 44.5% and 45.3% of our consolidated net revenues for the three months ended September 30, 2023 and 2022, respectively.

Cost of service revenues

Cost of service revenues increased $3.8 million, or 3.8%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. The key drivers of the increase in cost of service revenues were $2.2 million of higher employee compensation costs and $1.8 million of incremental depreciation related to capital assets recently placed in service, coupled with a $2.0 million unfavorable impact from changes in foreign currency exchange rates. Partially offsetting these factors was a $2.4 million decline in plant closure costs associated with the closure of the Willowbrook, Illinois facility.

Cost of product revenues

Cost of product revenues increased $0.7 million, or 5.4%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. The increase principally reflects higher Co-60 direct material costs compared to the same period in the prior year consistent with the increase in sales volume, partially offset by favorable impacts from changes in foreign currency exchange rates.

Operating Expenses

The following table compares our operating expenses for the three months ended September 30, 2023 to the three months ended September 30, 2022:

Operating expenses accounted for approximately 26.6% and 29.3% of our consolidated net revenues for the three months ended September 30, 2023 and 2022, respectively.

Selling, general and administrative expenses (“SG&A”)

SG&A decreased $3.0 million, or 5.2%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. The decrease was driven primarily by a $6.1 million decline in litigation and other professional services expense associated with our EO sterilization facilities and $0.5 million decrease in professional services and fees incurred in connection with various business enhancement and compliance efforts. Partially offsetting this decrease was a $3.8 million increase in share-based compensation expense attributable to awards granted under the 2020 Omnibus Incentive Plan.

Amortization of intangible assets

Amortization of intangible assets increased $0.1 million or 0.3% to $15.8 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 due mainly to changes in foreign currency exchange rates.

Interest Expense, Net

Interest expense, net increased $17.2 million, or 73.4%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. The increase was driven by a higher variable interest rate on borrowings previously outstanding in the same period of the prior year, resulting in $14.9 million of incremental interest expense coupled with interest expense of $11.3 million on incremental borrowings. In addition, amortization of debt issuance costs and debt discounts increased by $1.0 million. Partially offsetting the increase was a $3.4 million reduction to interest expense for interest capitalized on fixed assets, a $1.4 million increase in interest income on cash and cash equivalents on deposit at financial institutions and a $5.2 million net favorable change from interest rate derivative activity. The weighted average interest rate on our outstanding debt was 8.38% and 5.87% at September 30, 2023 and 2022, respectively.

Georgia EO Litigation Settlement

On October 16, 2023, the Company reached an agreement to resolve 79 EO claims against the Settling Defendants in the State of Georgia. Under the terms of the agreement, the Company will pay $35.0 million and the settling plaintiffs’ claims will be dismissed with prejudice. The settlement is subject to all of the plaintiffs consenting to their respective settlement payment allocations and to a stay of the trial that was scheduled to begin on October 23, 2023.

Foreign Exchange Gain

Foreign exchange gain was $0.4 million for the three months ended September 30, 2023 as compared to a gain of $0.5 million in the three months ended September 30, 2022. The change in foreign exchange (gain) loss in our Consolidated Statements of Operations and Comprehensive Income (Loss) mainly relates to short-term gains and losses on transactions 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 expense, net was $0.4 million for the three months ended September 30, 2023 compared to other income, net of $1.7 million for the three months ended September 30, 2022. The fluctuation was mainly driven by changes in the fair value of the embedded derivatives in Nordion’s contracts, resulting in a $1.5 million increase in other expense. In addition, pension income related to Nordion’s defined benefit pension plans decreased $0.6 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

Provision for Income Taxes

Provision for income tax decreased $2.8 million to a net provision of $14.1 million for the three months ended September 30, 2023 as compared to $16.9 million in the three months ended September 30, 2022. The change was partially attributable to lower pre-tax income in the three months ended September 30, 2023 compared to the three months ended September 30, 2022 (driven mainly by the $35.0 million Georgia EO litigation settlement accrual), partially offset by an increase in the valuation allowance, which was a direct result of the $35.0 million Georgia 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 September 30, 2023 differed from the statutory rate primarily due to an increase in 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 September 30, 2022 differed from the statutory rate primarily due to an increase in the valuation allowance, the impact of the foreign rate differential, and GILTI.

Net Income (Loss), Adjusted Net Income and Adjusted EBITDA

Net loss for the three months ended September 30, 2023 was $13.7 million, as compared to net income of $25.1 million for the three months ended September 30, 2022 due to the factors described above. Adjusted Net Income was $58.6 million for the three months ended September 30, 2023, as compared to $64.5 million for the three months ended September 30, 2022. Adjusted EBITDA was $134.3 million for the three months ended September 30, 2023, as compared to $125.2 million for the three months ended September 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.

Nine Months Ended September 30, 2023 as compared to Nine Months Ended September 30, 2022

The following table sets forth the components of our results of operations for the nine months ended September 30, 2023 and 2022.

(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 nine months ended September 30, 2023 to the nine months ended September 30, 2022.

Net revenues were $739.0 million in the nine months ended September 30, 2023, a decrease of $13.0 million, or 1.7%, as compared with the nine months ended September 30, 2022. Changes in foreign currency exchange rates had no material impact on consolidated net revenues in the nine months ended September 30, 2023 compared with the nine months ended September 30, 2022, although there were impacts when viewed at the segment reporting level.

Service revenues

Service revenues increased $23.2 million, or 3.6%, to $667.7 million in the nine months ended September 30, 2023 as compared to $644.5 million in the nine months ended September 30, 2022. The growth in net service revenues was driven by favorable pricing of $29.7 million and $6.5 million in the Sterigenics and Nelson Labs segments, respectively, coupled with a $3.2 million favorable impact from changes in foreign currency exchange rates. The increase in service revenue was partially offset by unfavorable volume and mix of $16.2 million across all segments.

Product revenues

Product revenues decreased $36.3 million, or 33.7%, to $71.4 million in the nine months ended September 30, 2023 as compared to $107.6 million in the nine months ended September 30, 2022. The decrease in product revenues was mainly driven by lower volumes of $38.9 million in the Nordion segment and unfavorable changes in foreign currency exchange rates of $3.4 million. Partially offsetting this decline was a favorable pricing impact of $6.0 million.

Total Cost of Revenues

The following table compares our cost of revenues by type for the nine months ended September 30, 2023 to the nine months ended September 30, 2022.

Total cost of revenues accounted for approximately 46.3% and 44.8% of our consolidated net revenues for the nine months ended September 30, 2023 and 2022, respectively.

Cost of service revenues

Cost of service revenues increased $18.9 million, or 6.5%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The key drivers of the increase in cost of service revenues were $8.4 million of higher employee compensation costs, $8.2 million of incremental depreciation related to capital assets recently placed in service, and $2.5 million of higher energy costs.

Cost of product revenues

Cost of product revenues decreased $13.8 million, or 31.3%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The decrease principally reflects lower shipment volumes compared to the same period in the prior year coupled with a $1.9 million unfavorable impact from changes in foreign currency exchange rates.

Operating Expenses

The following table compares our operating expenses for the nine months ended September 30, 2023 to the nine months ended September 30, 2022:

Operating expenses accounted for approximately 30.4% and 30.2% of our consolidated net revenues for the nine months ended September 30, 2023 and 2022, respectively.

SG&A

SG&A decreased $3.5 million, or 1.9%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The decrease was driven primarily by a $16.1 million decrease in litigation and other professional services expense associated with EO sterilization facilities. This decrease was partially offset by a $9.2 million increase in share-based compensation expense attributable to awards granted under the 2020 Omnibus Incentive Plan and a $2.0 million increase in selling and administrative personnel costs in support of various business enhancement and compliance efforts.

Amortization of intangible assets

Amortization of intangible assets increased $0.8 million or 1.6% to $48.1 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 due mainly to changes in foreign currency exchange rates.

Interest Expense, Net

Interest expense, net increased $52.4 million, or 109.3%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The increase was driven by a higher variable interest rate on borrowings previously outstanding in the same period of the prior year, resulting in $54.0 million of incremental interest expense coupled with interest expense of $28.9 million on incremental borrowings. In addition, amortization of debt issuance costs and debt discounts increased by $2.3 million. Partially offsetting the increase was a $13.0 million net favorable change from interest rate derivative activity, a $10.8 million increase in interest income on cash and cash equivalents on deposits at financial institutions and a $9.0 million reduction to interest expense for interest capitalized on fixed assets. The weighted average interest rate on our outstanding debt was 8.38% and 5.87% at September 30, 2023 and 2022, respectively.

Georgia EO Litigation Settlement

On October 16, 2023, the Company reached an agreement to resolve 79 EO claims against the Settling Defendants in the State of Georgia. Under the terms of the agreement, the Company will pay $35.0 million and the settling plaintiff’s claims will be dismissed with prejudice. The settlement is subject to all of the plaintiffs consenting to their respective settlement payment allocations and to a stay of the trial that was scheduled to begin on October 23, 2023.

Foreign Exchange (Gain) Loss

Foreign exchange loss was $0.4 million for the nine months ended September 30, 2023 as compared to a gain of $0.5 million in the nine months ended September 30, 2022. The change in foreign exchange (gain) loss in our Consolidated Statements of Operations and Comprehensive Income (Loss) mainly relates to short-term losses and gains on transactions 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 of our intercompany loans in certain of our international subsidiaries.

Other Income, Net

Other income, net decreased $0.9 million, or 21.3%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The fluctuation was mainly driven by a decrease in defined benefit pension income at Nordion of $1.5 million, partially offset by a $0.7 million decrease in the unrealized loss on embedded derivatives at Nordion.

Provision for Income Taxes

Provision for income tax decreased $21.6 million to a net provision of $27.7 million for the nine months ended September 30, 2023 as compared to $49.2 million for the nine months ended September 30, 2022. The change was attributable to lower pre-tax income for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 (driven mainly by the $35.0 million Georgia EO litigation settlement accrual), partially offset by an increase in the valuation allowance against our excess interest expense carryforward balance and the foreign rate differential. The increase in the valuation allowance was a direct result of the $35.0 million Georgia EO litigation settlement, as described in Note 15, “Commitments and Contingencies”. These expenses 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 nine months ended September 30, 2023 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 and the foreign rate differential, partially offset by a benefit for state income taxes. Provision for income taxes for the nine months ended September 30, 2022 differed from the statutory rate primarily due to a net increase in the valuation allowance, the impact of the foreign rate differential, and GILTI.

Net Income, Adjusted Net Income and Adjusted EBITDA

Net income for the nine months ended September 30, 2023 was $12.7 million, as compared to net income of $86.1 million for the nine months ended September 30, 2022 due to the factors described above. Adjusted Net Income was $156.0 million for the nine months ended September 30, 2023, as compared to $200.6 million for the nine months ended September 30, 2022. Adjusted EBITDA was $361.3 million for the nine months ended September 30, 2023, as compared to $376.6 million for the nine months ended September 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.

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.

Segment Results for the Three Months Ended September 30, 2023 and 2022

The following tables compare segment net revenue and segment income for the three months ended September 30, 2023 to the three months ended September 30, 2022:

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Net Revenues by Segment

Sterigenics net revenues were $168.3 million for the three months ended September 30, 2023, an increase of $10.6 million, or 6.7%, as compared to the three months ended September 30, 2022. The increase was attributable to a 6.3% favorable impact from pricing as well as a 2.2% favorable impact from changes in foreign currency exchange rates. The increase in segment revenue was partially offset by an unfavorable impact from volume and mix of 1.8% compared to the same period in the prior year.

Nordion net revenues were $40.1 million for the three months ended September 30, 2023, an increase of $5.0 million, or 14.3%, as compared to the three months ended September 30, 2022. The increase was primarily attributable to favorable pricing of 9.4% and volume and mix of 6.9%, partially offset by a 2.0% unfavorable impact from changes in foreign currency exchange rates.

Nelson Labs net revenues were $54.7 million for the three months ended September 30, 2023, a decrease of $1.2 million, or 2.1%, as compared to the three months ended September 30, 2022. The decrease was attributable to unfavorable volume and mix of 8.0%. Partially offsetting this decline was a favorable impact from pricing and foreign currency exchange rates of 4.1% and 1.8%, respectively.

Segment Income

Sterigenics segment income was $93.2 million for the three months ended September 30, 2023, an increase of $7.6 million, or 8.9%, as compared to the three months ended September 30, 2022. The increase in segment income and segment income margin was primarily a result of favorable pricing, partially offset by unfavorable volume and mix, as well as inflation.

Nordion segment income was $24.1 million for the three months ended September 30, 2023, an increase of $3.8 million, or 18.5%, as compared to the three months ended September 30, 2022. The increase in segment income and segment income margin was mainly driven by pricing and favorable volume and mix, partially offset by inflation.

Nelson Labs segment income was $17.1 million for the three months ended September 30, 2023, a decrease of $2.2 million, or 11.2%, as compared to the three months ended September 30, 2022. The decrease in segment income and segment income margin was primarily a result of unfavorable volume and mix as well as inflation, partially offset by favorable pricing.

Segment Results for the Nine Months Ended September 30, 2023 and 2022

The following tables compare segment net revenue and segment income for the nine months ended September 30, 2023 to the nine months ended September 30, 2022:

Net Revenues by Segment

Sterigenics net revenues were $494.9 million for the nine months ended September 30, 2023, an increase of $30.0 million, or 6.4%, as compared to the nine months ended September 30, 2022. The increase was attributable to pricing of 6.4%. Partially offsetting this factor was unfavorable volume and mix, which was equally offset by favorable changes in foreign currency exchange rates.

Nordion net revenues were $80.6 million for the nine months ended September 30, 2023, a decrease of $38.9 million, or 32.6%, as compared to the nine months ended September 30, 2022. The decrease was driven by unfavorable volume and mix of 34.4% and an impact of 3.3% from changes in foreign exchange rates. Partially offsetting this decrease was a favorable impact from pricing of 5.1%.

Nelson Labs net revenues were $163.5 million for the nine months ended September 30, 2023, a decrease of $4.1 million, or 2.4%, as compared to the nine months ended September 30, 2022. The decrease was attributable to unfavorable volume and mix of 6.8%, partially offset by favorable impact from pricing and changes in foreign currency exchange rates of 3.9% and 0.5%, respectively.

Segment Income

Sterigenics segment income was $267.5 million for the nine months ended September 30, 2023, an increase of $17.4 million, or 6.9%, as compared to the nine months ended September 30, 2022. The increase in segment income was fueled mainly by favorable pricing, as referenced above, partially offset by unfavorable volume and mix as well as ongoing pressure from inflation.

Nordion segment income was $43.4 million for the nine months ended September 30, 2023, a decrease of $25.8 million, or 37.3%, as compared to the nine months ended September 30, 2022. The decrease in segment income and segment income margin was driven mainly by an expected unfavorable volume and mix compared to the same period of the prior year.

Nelson Labs segment income was $50.5 million for the nine months ended September 30, 2023, a decrease of $6.9 million, or 12.0%, as compared to the nine months ended September 30, 2022. The decrease in segment income and segment income margin was primarily a result of unfavorable volume and mix coupled with the ongoing impact of inflation, partially offset by favorable pricing.

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 and Adjusted EBITDA rather than net income (loss), 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 related to 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 (loss) and other GAAP measures.

The following table presents a reconciliation of net income (loss), 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:

(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 and losses 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 nine months ended September 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 $10.2 million and $18.0 million of interest expense, net for the three and nine months ended September 30, 2023, respectively, associated with Term Loan B that was issued to finance the $408.0 million cost of the Willowbrook Settlement under the Willowbrook Settlement Agreements. See Note 15, “Commitments and Contingencies”.

(h) Represents the cost of the Gwinnett and Cobb Counties Settlement as outlined in the October 2023 Term Sheet, subject to all of the plaintiffs consenting to their respective settlement payment allocations. See Note 15, “Commitments and Contingencies”.

(i) 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.

(j) Represents non-recurring costs associated with the COVID-19 pandemic, including incremental costs to implement workplace health and safety measures.

(k) 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.

(l) The three and nine months ended September 30, 2023 exclude $10.2 million and $18.0 million, respectively, of interest expense, net, on Term Loan B attributable to the loan proceeds that were used to fund the $408.0 million cost of the Willowbrook Settlement. The three and nine months ended September 30, 2022 exclude $3.3 million of unrealized loss and $6.1 million of unrealized gain, respectively, on interest rate derivatives not designated as hedging instruments.

(m) Includes depreciation of Co-60 held at gamma irradiation sites.

(n) Represents the difference between the income tax provision as determined under U.S. GAAP and the income tax benefit associated with pre-tax adjustments described in footnote (k).

(o) $22.4 million and $22.1 million of the adjustments for the three months ended September 30, 2023 and 2022, respectively, and $69.7 million and $62.8 million of the adjustments for the nine months ended September 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 September 30, 2023, we had $252.5 million of cash and cash equivalents. This is a decrease of $143.8 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 $167.5 million at September 30, 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 (the “2023 Term Loan”) 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 September 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 expenditure 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 September 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 nine months ended September 30, 2023, our capital expenditures amounted to $150.1 million, compared to $110.6 million for the nine months ended September 30, 2022.

Cash Flow Information

Operating activities

Cash flows from operating activities decreased $436.9 million to net cash used of $260.9 million in the nine months ended September 30, 2023 compared to net cash provided of $176.0 million for the nine months ended September 30, 2022. The decrease in cash flows from operating activities in the nine months ended September 30, 2023 compared to the nine months ended September 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.

Investing activities

Cash used by investing activities increased $39.9 million to net cash used of $150.1 million in the nine months ended September 30, 2023 compared to $110.2 million for the nine months ended September 30, 2022. The variance was primarily driven by an increase in capital expenditures of $39.5 million in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Financing activities

Cash provided by financing activities increased $271.2 million to net cash provided of $269.8 million for the nine months ended September 30, 2023 compared to $1.5 million of cash used for financing activities for the nine months ended September 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 $25.6 million of debt issuance costs incurred in connection with the issuance of Term Loan B and the revolving credit facility amendment during the nine months ended September 30, 2023, as described in “Debt Facilities” below. Financing activities for the nine months ended September 30, 2023 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 September 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 September 30, 2023 and September 30, 2022 was 8.14% and 4.96%, respectively, and 7.82% and 3.92% for the nine months ended September 30, 2023 and September 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 Secured Overnight Financing Rate (“Term SOFR”) (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 the 2023 Term Loan 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 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 September 30, 2023 was 8.84%.

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 $76.3 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 $165.1 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 0.10% (subject to a minimum floor of 0.00%). After giving effect to the Revolving Credit Facility Amendment, the aggregate amount of the lenders’ revolving commitments is $423.8 million. The maturity date of the Revolving Credit Facility remains June 13, 2026. The Company borrowed $200.0 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 September 30, 2023, there were no 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 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 sixty 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 September 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 September 30, 2023, the Company had $24.0 million of letters of credit issued against the Revolving Credit Facility, resulting in total availability under the Revolving Credit Facility of $399.8 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 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 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 10-K. There have been no significant changes in critical accounting policies, management estimates or accounting policies since the year ended December 31, 2022.

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.

Market risks are described within “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our Form 10-K. These market risks have not materially changed for the three and nine months ended September 30, 2023.

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 nine months ended September 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.

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 Reports on Form 10-Q for the quarter ended March 31, 2023 and June 30, 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 is expected to adopt final NESHAP requirements by March of 2024 and adopt an interim decision under FIFRA by later in 2024. The US EPA’s April 2023 proposals contemplate that existing facilities will be required to comply with many of the requirements as soon as 18 months following adoption.