Sotera Health Co: Form 10-Q for the period ended Mar 31, 2024

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 2023 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 2023 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 months ended March 31, 2024, we recorded net revenues of $248.2 million, net income of $6.3 million, Adjusted Net Income of $35.6 million and Adjusted EBITDA of $111.9 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 have impacted our operating results for the three months ended March 31, 2024 and may continue to affect our performance and financial condition in future periods.

• Business and market conditions. Net revenues and segment income for each of our three segments increased in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, which was primarily a result of an overall improvement in volume at Nordion and Nelson Labs and sustained favorability in pricing at Sterigenics and Nelson Labs. Nordion’s volume increased in the three months ended March 31, 2024 as compared to unusually light volume in the three months ended March 31, 2023 due to the timing of Co-60 harvest schedules.

As discussed in more detail in our 2023 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. There was no impact to our supply or revenue during the three months ended March 31, 2024.

• 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 its lab information management system.
• 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 injury by purported exposure to EO used, emitted or released by current facilities in Atlanta, Georgia, Santa Teresa, New Mexico, and Los Angeles, California 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 negatively impacted Santa Teresa and surrounding communities. 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. See Part II. Item 1., “Legal Proceedings” and Note 14, “Commitments and Contingencies” to our consolidated financial statements.

For the three months ended March 31, 2024 and 2023, we recorded costs of $6.3 million and $14.0 million, respectively, representing professional fees and other expenses related to litigation associated with our EO sterilization facilities.

With respect to the litigation related to our Atlanta, Georgia facility, in October 2023, Sterigenics, agreed to pay $35.0 million to settle 79 of the Atlanta Cases, including a personal injury case that was scheduled to begin trial in the State Court of Gwinnett County that month, and 78 other cases being pursued by the same Plaintiff’s counsel (previously referred to as the “Atlanta Settlement”). The Atlanta Settlement was completed in January 2024, with the settling plaintiffs agreeing to file the necessary dismissals and, where required, motions for court approval. The Company denies any liability and the Atlanta Settlement 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.

• Borrowings, financing costs and financial leverage. On March 1, 2024, the Company entered into Amendment No. 3 to the First Lien Credit Agreement. Among other changes, the Amendment provides (i) for new commitments under the existing Revolving Credit Facility to replace existing revolving commitments in an aggregate principal amount of $83 million, (ii) that certain of the lenders providing revolving credit commitments shall also provide additional commitments for the issuance of letters of credit under the Revolving Credit Facility in an aggregate principal amount of $37.5 million, and (iii) for the extension of the maturity date of the Revolving Credit Facility to the earlier of (a) March 1, 2029, and (b) the date that is 91 days prior to the maturity date of the Company’s existing term loans. The Amendment does not give effect to any other material changes to the terms and conditions of the Credit Agreement, including with respect to the amount of commitments under the Revolving Credit Facility which remains $423.8 million.

CONSOLIDATED RESULTS OF OPERATIONS

Three Months Ended March 31, 2024, as compared to Three Months Ended March 31, 2023

The following table sets forth the components of our results of operations for the three months ended March 31, 2024 and 2023:

(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 March 31, 2024 to the three months ended March 31, 2023:

Net revenues were $248.2 million in the three months ended March 31, 2024, an increase of $27.6 million, or 12.5%, as compared with the three months ended March 31, 2023. Excluding the impact of foreign currency exchange rates, net revenues in the three months ended March 31, 2024 increased approximately 11.8% compared with the three months ended March 31, 2023.

Service revenues

Service revenues increased $12.0 million, or 5.6%, to $226.5 million for the three months ended March 31, 2024, as compared to $214.5 million for the three months ended March 31, 2023. The growth in net service revenues was driven by favorable pricing of $7.9 million and $1.6 million in the Sterigenics and Nelson Labs segments, respectively, favorable improvements in volume and mix of $3.9 million in the Nelson Labs segment and a $1.4 million favorable impact from changes in foreign currency exchange rates across all segments. Partially offsetting these growth factors was an unfavorable impact from volume and mix of $2.7 million in the Sterigenics segment.

Product revenues

Product revenues increased $15.6 million, or 256.8%, to $21.7 million for the three months ended March 31, 2024, as compared to $6.1 million for the three months ended March 31, 2023. The increase in product revenues was driven almost entirely by improvements in volume and mix at Nordion, which was largely attributable to a more favorable Co-60 harvest schedule timing in the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Total Cost of Revenues

The following table compares our cost of revenues by type for the three months ended March 31, 2024 to the three months ended March 31, 2023:

Total cost of revenues accounted for approximately 48.8% and 49.5% of our consolidated net revenues for the three months ended March 31, 2024 and 2023, respectively.

Cost of service revenues

Cost of service revenues increased $6.6 million, or 6.4%, for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. The growth in cost of service revenues was primarily driven by higher employee compensation costs of $3.7 million coupled with an increase of $1.3 million in repairs and maintenance costs, $1.0 million of depreciation related to capital assets recently placed in service, and a $0.7 million unfavorable impact from changes in foreign currency exchange rates.

Cost of product revenues

Cost of product revenues increased $5.3 million, or 109.3%, for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. The increase was primarily a result of higher volumes of Co-60 shipments, which resulted in increases in direct material and material transportation costs of $4.9 million.

Operating Expenses

The following table compares our operating expenses for the three months ended March 31, 2024 to the three months ended March 31, 2023:

Operating expenses accounted for approximately 29.8% and 35.4% of our consolidated net revenues for the three months ended March 31, 2024 and 2023, respectively.

SG&A

SG&A decreased $3.7 million, or 6.0%, for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. The decrease was driven primarily by a $7.6 million decline in litigation and other professional services expense associated with EO sterilization facilities, partially offset by a $2.8 million increase in selling, general and administrative compensation-related costs and a $1.3 million increase in share-based compensation expense.

Amortization of intangible assets

Amortization of intangible assets decreased $0.5 million, or 3.1% for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023 due to changes in foreign currency exchange rates.

Interest Expense, Net

Interest expense, net increased $12.9 million, or 44.7%, for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. Approximately $8.4 million of this change was attributable to a combination of higher variable benchmark interest rates and changes in principal balances outstanding. A decline in the benefit from interest rate derivatives of $4.3 million also contributed to the increase. The weighted average interest rate on our outstanding debt was 8.39% and 7.85% at March 31, 2024 and 2023, respectively.

Foreign Exchange (Gain) Loss

Foreign exchange gain was $0.6 million for the three months ended March 31, 2024 compared to a loss of $0.3 million for the three months ended March 31, 2023. The change in foreign exchange 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 15, “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 $1.0 million for the three months ended March 31, 2024 compared to other income of $1.3 million for the three months ended March 31, 2023. The variance was primarily a result of $1.6 million of changes in the fair value of embedded derivatives in Nordion’s purchase contracts as well as $0.7 million of refinancing costs incurred in connection with Amendment No. 3 to the Revolving Credit Facility.

Provision for Income Taxes

Provision for income taxes increased $2.1 million to a net provision of $4.7 million for the three months ended March 31, 2024, as compared to $2.6 million for the three months ended March 31, 2023. The change was primarily attributable to higher pre-tax income for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 combined with 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 EO litigation settlements in Illinois and Georgia. Both payments eliminated the deductibility of U.S. interest in the current year and the year ended December 31, 2023, which resulted in an increase to the valuation allowance against our excess interest expense carryforward balance.

Provision for income taxes for the three months ended March 31, 2024 differed from the statutory rate primarily due to an increase in the valuation allowance against our excess interest expense carryforward balance and the impact of the foreign rate differential, partially offset by a benefit for state income taxes. Provision for income taxes for the three months ended March 31, 2023 differed from the statutory rate primarily due to an increase in the valuation allowance against our excess interest expense carryforward balance, the impact of the foreign rate differential and non-deductible compensation.

Net Income, Adjusted Net Income and Adjusted EBITDA

Net income for the three months ended March 31, 2024 was $6.3 million, as compared to $2.8 million for the three months ended March 31, 2023. Adjusted Net Income was $35.6 million for the three months ended March 31, 2024, as compared to $35.9 million for the three months ended March 31, 2023, due to the factors described above. Adjusted EBITDA was $111.9 million for the three months ended March 31, 2024, as compared to $98.5 million for the three months ended March 31, 2023, due to the factors described above. 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.

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 its 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, 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 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;
• refinancing costs and 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, Santa Teresa, New Mexico and Los Angeles, California, 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:

(a) Represents share-based compensation expense to employees and Non-Employee Directors.

(b) Represents the effects of (i) fluctuations in foreign currency exchange rates and (ii) non-cash mark-to-fair value of embedded derivatives relating to certain customer and supply contracts at Nordion.

(c) Represents (i) certain costs related to acquisitions and the integration of recent acquisitions, (ii) the earnings impact of fair value adjustments (excluding those recognized within amortization expense) resulting from the businesses acquired, (iii) transition services income and non-cash deferred lease income associated with the terms of the divestiture of the Medical Isotopes business in 2018, (iv) professional fees and other costs associated with business optimization, cost saving and other process enhancement projects, and (v) professional fees, payroll costs, and other costs, including ongoing lease and utility expenses associated with the closure of the Willowbrook, Illinois facility. The three months ended March 31, 2023 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.

(d) The three months ended March 31, 2024 includes $1.1 million of expenses incurred in connection with the secondary offering of our common stock that closed on March 4, 2024 and write-off of unamortized debt issuance costs in connection with Amendment No. 3 to the Revolving Credit Facility.

(e) Represents litigation and other professional fees associated with our EO sterilization facilities. Amounts presented for the three months ended March 31, 2023 have been adjusted to exclude interest expense, net associated with Term Loan B attributable to the loan proceeds that were used to fund the $408.0 million Illinois EO litigation settlement.

(f) 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 and are accreted over the life of the asset.

(g) 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.

(h) Interest expense, net presented in this reconciliation for the three months ended March 31, 2023 has been adjusted to conform to the current year presentation to include 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.

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

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

(k) $23.8 million and $22.9 million of the adjustments for the three months ended March 31, 2024 and 2023, respectively, are included in cost of revenues, primarily consisting of amortization of intangible assets, depreciation, and accretion of asset retirement obligations.

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

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.

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

Nelson Labs 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 16, “Segment Information” to our consolidated financial statements.

Segment Results for the Three Months Ended March 31, 2024 and 2023

The following tables compare segment net revenue and segment income for the three months ended March 31, 2024 to the three months ended March 31, 2023:

Net Revenues by Segment

Sterigenics net revenues were $166.5 million for the three months ended March 31, 2024, an increase of $6.5 million, or 4.1%, as compared to the three months ended March 31, 2023. The increase reflects a benefit from pricing and changes in foreign currency exchange rates of 4.9% and 0.8%, respectively, partially offset by an unfavorable impact from volume and mix of 1.6%.

Nordion net revenues were $24.0 million for the three months ended March 31, 2024, an increase of $15.5 million, or 180.8%, as compared to the three months ended March 31, 2023. Revenue growth was driven almost entirely by volume and mix, which was largely attributable to a more favorable Co-60 harvest schedule timing for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Nelson Labs net revenues were $57.7 million for the three months ended March 31, 2024, an increase of $5.6 million, or 10.8%, as compared to the three months ended March 31, 2023. The increase was primarily driven by volume and mix of 7.4% and a favorable pricing impact of 3.1%.

Segment Income

Sterigenics segment income was $85.8 million for the three months ended March 31, 2024, an increase of $3.0 million, or 3.6%, as compared to the three months ended March 31, 2023. Segment income increased primarily due to the benefit of pricing, partially offset by the impacts of volume/mix and inflation.

Nordion segment income was $10.8 million for the three months ended March 31, 2024, an increase of $9.3 million, or 606.7%, as compared to the three months ended March 31, 2023. The increase in segment income and segment income margin was driven almost entirely by improvements in volume and mix, mainly stemming from favorable Co-60 harvest schedule timing, as referenced above.

Nelson Labs segment income was $15.3 million for the three months ended March 31, 2024, an increase of $1.2 million, or 8.8%, as compared to the three months ended March 31, 2023. The increase in segment income was primarily a result of volume and mix improvements as well as favorable pricing.

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 March 31, 2024, we had $261.1 million of unrestricted cash and cash equivalents. This is a decrease of $35.3 million from the balance at December 31, 2023. The decrease in cash and cash equivalents was mainly attributable to the $35.0 million payment of the Atlanta settlement in January 2024. Our foreign subsidiaries held cash of approximately $249.6 million at March 31, 2024 and $224.1 million at December 31, 2023. No material restrictions exist to accessing cash held by our foreign subsidiaries notwithstanding any potential tax consequences.

As described in more detail below, on March 1, 2024, the Company and SHH entered into Amendment No. 3 to the Revolving Credit Facility. The Amendment did not materially change to the terms and conditions of the Credit Agreement, including with respect to the amount of commitments under the Revolving Credit Facility, which remains $423.8 million.

As also described in more detail below, on February 23, 2023, we entered into 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. 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 used the remaining proceeds for other 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 (inclusive of 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 March 31, 2024, 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 March 31, 2024, our interest rate derivatives limit our cash flow exposure of our variable rate borrowings under the Term Loans. Refer to Note 15, “Financial Instruments and Financial Risk” under the heading “Derivative Instruments” for additional information about changes in interest rate risk.

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 three months ended March 31, 2024, our capital expenditures amounted to $34.9 million, compared to $45.0 million for the three months ended March 31, 2023.

Cash Flow Information

Three Months Ended March 31, 2024 compared to the Three Months Ended March 31, 2023

37

Operating activities

Cash flows provided by operating activities decreased $24.2 million to net cash provided of $9.7 million for the three months ended March 31, 2024 compared to $33.9 million for the three months ended March 31, 2023. The decrease in cash flows from operating activities in the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was driven primarily by the $35.0 million payment of the Atlanta settlement, partially offset by changes in working capital of approximately $12.1 million.

Investing activities

Cash used in investing activities decreased $10.1 million to net cash used of $34.9 million for the three months ended March 31, 2024 compared to $45.0 million for the three months ended March 31, 2023. The variance was driven by a decrease in capital expenditures of $10.1 million in the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Financing activities

Cash used in financing activities was $11.9 million for the three months ended March 31, 2024 compared to cash provided by financing activities of $273.9 million for the three months ended March 31, 2023. The difference was mainly attributable to $500.0 million in proceeds from the issuance of Term Loan B on February 23, 2023 and the $200.0 million paydown of the outstanding balance on the Revolving Credit Facility in February 2023. Additionally, the Company paid $24.5 million of debt issuance costs during the three months ended March 31, 2023 in connection with the issuance of Term Loan B compared to $1.3 million of issuance costs paid for Amendment No. 3 to the Revolving Credit Facility in the three months ended March 31, 2024, as described in “Debt Facilities” below. In addition, the Company paid $6.7 million in the three months ended March 31, 2024 to acquire certain facilities through the settlement of a finance lease.

Debt Facilities

On December 13, 2019, 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 June 13, 2026. 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 March 31, 2024 and December 31, 2023, 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 March 31, 2024 and March 31, 2023 was 8.26% and 7.44%, respectively.

On March 1, 2024, the Company and SHH entered into Amendment No. 3 (“Amendment No. 3”) to the Revolving Credit Facility. Among other changes, the Amendment provides (i) for new commitments under the existing Revolving Credit Facility to replace existing revolving commitments in an aggregate principal amount of $83.0 million, (ii) that certain of the lenders providing revolving credit commitments shall also provide additional commitments for the issuance of letters of credit under the Revolving Credit Facility in an aggregate principal amount of $37.5 million and (iii) for the extension of the maturity date of the Revolving Credit Facility to the earlier of (a) March 1, 2029, and (b) the date that is 91 days prior to the maturity date of the Company’s existing term loans.

Amendment No. 3 does not give effect to any other material changes to the terms and conditions of the Credit Agreement, including with respect to the amount of commitments under the Revolving Credit Facility, which remains $423.8 million, the representations and warranties, events of default, affirmative or negative covenants.

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 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 by 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. The Company utilized 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 months ended March 31, 2024 and the three months ended March 31, 2023 was 9.09% and 8.82%, respectively.

On March 21, 2023, the Company 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. 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 Secured Overnight Financing Rate (“SOFR”) plus an applicable credit spread adjustment of 0.10% (subject to a minimum floor of 0%). After giving effect to the Revolving Credit Facility Amendment, the aggregate amount of the lenders' revolving commitments is $423.8 million. As of March 31, 2024 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 and the judgments were not stayed or remained undischarged for a period of sixty consecutive days or if, to enforce such judgments, a judgment creditor were to attach liens upon assets that are material to the business and operations of the Company and certain of its subsidiaries as a whole. As of March 31, 2024, 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 March 31, 2024, the Company had $23.7 million of letters of credit issued against the Revolving Credit Facility, resulting in total availability under the Revolving Credit Facility of $400.1 million.

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 our 2023 Form 10-K. There have been no significant changes in critical accounting policies, management estimates or accounting policies since the year ended December 31, 2023.

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 2023 Form 10-K. These market risks have not materially changed for the three months ended March 31, 2024.

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 months ended March 31, 2024, 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 Annual Report on Form 10-K for the year ended December 31, 2023 is hereby updated by adding at the end of that risk factor the paragraphs immediately below. Other than this addition, the text of the risk factors is unchanged.

On March 14, 2024, the US EPA announced final NESHAP rules to govern EO sterilization facilities in the United States. The final regulation, which was published in the Federal Register on April 5, 2024, requires EO sterilization facilities to implement additional air pollution technologies, practices and procedures designed to further reduce EO emissions. For facilities like ours, the final NESHAP regulation imposes new requirements such as higher efficiencies for EO emission controls, implementation of permanent total enclosure capture technology, and use of continuous emissions monitoring systems (or, CEMS). Our operations are required to comply with the final NESHAP EO sterilizer regulation by April 6, 2026 and to demonstrate compliance within 180 days after that date. The US EPA has not yet issued an ID in the FIFRA re-registration process. The issuance of an ID remains expected by the third quarter of 2024, although US EPA could issue the ID sooner.

We believe that our investments in emission control enhancements at our EO facilities have positioned us to be able to comply with the updated NESHAP requirements within the timeframes specified by the final rule, but the requirements of the final rule represent significant changes from historical requirements and are challenging for existing EO sterilization facilities like ours, and therefore we cannot provide certainty that we will be able to comply with the requirements of the final rule at our EO facilities within the time required. The FIFRA ID for EO also will apply to our EO sterilization facilities in the United States, and certain requirements proposed for the ID in 2023 would require practices that remain untested or not widely adopted at existing EO sterilization facilities and could be inconsistent with meeting the requirements of the final NESHAP rule. Compliance with the final NESHAP and ID may ultimately require additional facility modifications, capital expenditures and operational costs beyond what the Company is presently anticipating.