Sotera Health Co: Form 10-Q for the period ended Jun 30, 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 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 10-K.

OVERVIEW

We are a leading global provider of mission-critical end-to-end sterilization solutions, lab testing and advisory services for the healthcare industry. We are driven by our mission: Safeguarding Global Health®. We provide end-to-end sterilization as well as microbiological and analytical lab testing and advisory services to help ensure that medical, pharmaceutical and food products are safe for healthcare practitioners, patients and consumers in the United States and around the world. Our services are an essential aspect of our customers’ manufacturing process and supply chains, helping to ensure sterilized medical products reach healthcare practitioners and patients. Most of these services are necessary for our customers to satisfy applicable government requirements.

We serve our customers throughout their product lifecycles, from product design to manufacturing and delivery, helping to ensure the sterility, effectiveness and safety of their products for the end user. We operate across two core businesses: sterilization services and lab services. The combination of Sterigenics, our terminal sterilization business, and Nordion, our Co-60 supply business, makes us the only vertically integrated global gamma sterilization provider in the sterilization industry. For financial reporting purposes, our sterilization services business consists of two reportable segments, Sterigenics and Nordion, and our lab services business consists of one reportable segment, Nelson Labs.

For the three and six months ended June 30, 2024, respectively, we recorded net revenues of $276.6 million and $524.8 million, net income of $8.8 million and $15.1 million, Adjusted Net Income of $55.2 million and $90.8 million, and Adjusted EBITDA of $137.3 million and $249.3 million. For the definition of Adjusted Net Income and Adjusted EBITDA and the reconciliation of these non-GAAP measures from net income, please see “Non-GAAP Financial Measures.”

STRATEGIC DEVELOPMENTS AND KEY FACTORS AFFECTING OUR RESULTS OF OPERATIONS

The following summarizes strategic developments and key factors that impacted our operating results for the three and six months ended June 30, 2024 and may continue to affect our performance and financial condition in future periods.

• Business and market conditions. Consolidated net revenues for the three months ended June 30, 2024 increased 8.3% from the same period of the prior year, mainly driven by improved volumes and sustained favorability in pricing across all segments.

Consolidated net revenues for the six months ended June 30, 2024 increased 10.3% from the same period of the prior year, due to higher volumes in the Nordion and Nelson Labs segments and favorable pricing across all segments.

As discussed in more detail in our 2023 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 and six months ended June 30, 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 and six months ended June 30, 2024, we recorded costs of $7.8 million and $14.2 million, respectively, representing professional fees and other expenses related to litigation associated with our EO sterilization facilities.

• Borrowings and financial leverage. On May 30, 2024, the Company and SHH entered into Amendment No. 4 to the Senior Secured Credit Facilities, which provided for the issuance of term loans to the Company in an aggregate principal amount of $1.5 billion maturing on May 30, 2031. On the same date, the Company issued Secured Notes in an aggregate principal amount of $750.0 million, which bear interest at an annual rate of 7.375% and mature on June 1, 2031. The proceeds from the Refinancing Term Loans and the issuance of the Secured Notes, along with cash on the balance sheet, were used to refinance all of the Company’s outstanding existing term loans due December 2026.

On March 21, 2024, the Company entered into Amendment No. 3 to the Senior Secured Credit Facilities. 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 March 1, 2029. 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 Amendment, which remains $423.8 million.

CONSOLIDATED RESULTS OF OPERATIONS

Three Months Ended June 30, 2024 as compared to Three Months Ended June 30, 2023

The following table sets forth the components of our results of operations for the three months ended June 30, 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 June 30, 2024 to the three months ended June 30, 2023.

Net revenues were $276.6 million in the three months ended June 30, 2024, an increase of $21.3 million, or 8.3%, as compared with the three months ended June 30, 2023. Excluding the impact of foreign currency exchange rates, net revenues in the three months ended June 30, 2024 increased approximately 8.8% compared with the three months ended June 30, 2023.

Service revenues

Service revenues increased $11.7 million, or 5.2%, to $237.8 million in the three months ended June 30, 2024 as compared to $226.1 million in the three months ended June 30, 2023. The growth in net service revenues was primarily driven by favorable pricing of $8.0 million and $1.7 million in the Sterigenics and Nelson Labs segments, respectively. Sterigenics and Nelson Labs also benefited from a favorable increase in volume and mix of $2.4 million and $0.8 million, respectively.

Product revenues

Product revenues increased $9.6 million, or 32.9%, to $38.8 million in the three months ended June 30, 2024 as compared to $29.2 million in the three months ended June 30, 2023. The timing of reactor harvest schedules was a primary driver for improvements in volume and mix of $8.7 million at Nordion. In addition, Nordion benefited from favorable pricing impacts of $1.2 million.

Total Cost of Revenues

The following table compares our cost of revenues by type for the three months ended June 30, 2024 to the three months ended June 30, 2023.

Total cost of revenues accounted for approximately 44.8% and 45.3% of our consolidated net revenues for the three months ended June 30, 2024 and 2023, respectively.

Cost of service revenues

Cost of service revenues increased $5.2 million, or 5.0%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023. The growth in cost of service revenues was partially driven by a $4.5 million increase in employee compensation costs and $1.1 million of depreciation related to capital assets recently placed in service.

Cost of product revenues

Cost of product revenues increased $2.9 million, or 24.4%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023. The increase was primarily a result of higher volumes of Co-60 shipments, which resulted in increases in direct material and transportation costs of $2.9 million.

Operating Expenses

The following table compares our operating expenses for the three months ended June 30, 2024 to the three months ended June 30, 2023:

Operating expenses accounted for approximately 27.5% and 29.9% of our consolidated net revenues for the three months ended June 30, 2024 and 2023, respectively.

SG&A

SG&A expenses increased $0.3 million, or 0.5%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023. The increase was primarily driven by a $1.8 million increase in share-based compensation expense and a $1.4 million increase in other incremental SG&A compensation-related costs. The increase was partially offset by a $2.3 million decline in legal and other professional services expenses.

Amortization of intangible assets

Amortization of intangible assets decreased $0.7 million to $15.4 million, or 4.2%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023 due mainly to changes in foreign currency exchange rates.

Interest Expense, Net

Interest expense, net increased $9.7 million, or 31.4%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023. The main drivers of the increase in interest expense, net were a $5.3 million decline in interest income and a $4.5 million decline in favorable impacts from interest rate derivative activity. The weighted average interest rate on our outstanding debt was 8.19% and 8.20% at June 30, 2024 and 2023, respectively.

Loss on Refinancing of Debt

Loss on refinancing of debt for the three months ended June 30, 2024 was $23.4 million and occurred in connection with the refinancing of our capital structure in May 2024. The refinancing activity resulted in the write off of certain unamortized debt issuance costs and discounts on the Term Loans due 2026. In addition, certain new debt issuance costs and discounts were expensed upon the issuance of the Refinancing Term Loans and Secured Notes.

Foreign Exchange (Gain) Loss

Foreign exchange gain was $0.6 million for the three months ended June 30, 2024 as compared to a loss of $0.5 million in the three months ended June 30, 2023. The change in foreign exchange (gain) loss in our Consolidated Statements of Operations and Comprehensive Income (Loss) mainly relates to short-term losses (offset by short-term gains) on sales denominated in currencies other than the functional currency of our operating entities. As described in Note 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 Income, Net

Other income, net was $1.5 million for the three months ended June 30, 2024 compared to $2.5 million for the three months ended June 30, 2023. The majority of the variance stemmed from a net decrease in the fair value of Nordion’s embedded derivative assets, resulting in a decrease in other income of $0.9 million from the three months ended June 30, 2024 compared to the same period of the prior year.

Provision for Income Taxes

Provision for income tax decreased $4.6 million to a net provision of $6.4 million for the three months ended June 30, 2024 as compared to $11.0 million in the three months ended June 30, 2023. The change was primarily attributable to lower pre-tax income for the three months ended June 30, 2024 compared to the three months ended June 30, 2023, partially offset by an

increase in the valuation allowance against our excess interest expense carryforward balance.

Provision for income taxes for the three months ended June 30, 2024 differed from the statutory rate primarily due to the impact of 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 three months ended June 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, the impact of the foreign rate differential, and GILTI.

Net Income, Adjusted Net Income and Adjusted EBITDA

Net income for the three months ended June 30, 2024 was $8.8 million, as compared to net income of $23.5 million for the three months ended June 30, 2023 due to the factors described above. Adjusted Net Income was $55.2 million for the three months ended June 30, 2024, as compared to $55.5 million for the three months ended June 30, 2023, and Adjusted EBITDA was $137.3 million for the three months ended June 30, 2024, as compared to $128.5 million for the three months ended June 30, 2023. 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.

Six Months Ended June 30, 2024 as compared to Six Months Ended June 30, 2023

The following table sets forth the components of our results of operations for the six months ended June 30, 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 six months ended June 30, 2024 to the six months ended June 30, 2023.

Net revenues were $524.8 million in the six months ended June 30, 2024, an increase of $48.9 million, or 10.3%, as compared with the six months ended June 30, 2023. Excluding the impact of foreign currency exchange rates, net revenues in the six months ended June 30, 2024 increased approximately 10.2% compared with the six months ended June 30, 2023.

Service revenues

Service revenues increased $23.7 million, or 5.4%, to $464.2 million in the six months ended June 30, 2024 as compared to $440.6 million in the six months ended June 30, 2023. The growth in net service revenues was primarily driven by favorable pricing of $15.9 million and $3.3 million in the Sterigenics and Nelson Labs segments, respectively, a favorable change in service revenue volume and mix of $4.7 million in the Nelson Labs segment and a benefit from changes in foreign currency exchange rates of $0.6 million.

Product revenues

Product revenues increased $25.2 million, or 71.4%, to $60.5 million in the six months ended June 30, 2024 as compared to $35.3 million in the six months ended June 30, 2023. The timing of reactor harvest schedules was a primary driver for the improvements in volume and mix of $24.3 million at Nordion. In addition, Nordion benefited from favorable pricing impacts of $1.3 million.

Total Cost of Revenues

The following table compares our cost of revenues by type for the six months ended June 30, 2024 to the six months ended June 30, 2023.

Total cost of revenues accounted for approximately 46.7% and 47.2% of our consolidated net revenues for the six months ended June 30, 2024 and 2023, respectively.

Cost of service revenues

Cost of service revenues increased $11.9 million, or 5.7%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023. The growth in cost of service revenues was primarily driven by higher employee compensation costs of $8.1 million, a $2.2 million increase in depreciation related to capital assets recently placed in service, and a $1.4 million increase in certain facility repairs and maintenance costs.

Cost of product revenues

Cost of product revenues increased $8.2 million, or 49.2%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023. The increase was primarily a result of higher volumes of Co-60 shipments, which resulted in increases in direct material and transportation costs of $7.8 million.

Operating Expenses

The following table compares our operating expenses for the six months ended June 30, 2024 to the six months ended June 30, 2023:

Operating expenses accounted for approximately 28.6% and 32.5% of our consolidated net revenues for the six months ended June 30, 2024 and 2023, respectively.

SG&A expenses

SG&A expenses decreased $3.4 million, or 2.8%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023. The decrease was driven primarily by a $9.6 million decline in legal and other professional services expenses. This decrease was partially offset by a $3.1 million increase in share-based compensation expense and $3.1 million of other incremental SG&A compensation-related costs.

Amortization of intangible assets

Amortization of intangible assets decreased $1.2 million to $31.1 million, or 3.6%, for the six months ended June 30, 2024 as compared to the three months ended June 30, 2023 due mainly to changes in foreign currency exchange rates.

Interest Expense, Net

Interest expense, net increased $22.6 million, or 37.9%, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023. The increase was mainly driven by an increase in the interest rate on variable rate borrowings over the course of the first half of 2024, which contributed to a $9.5 million increase interest expense. The variance was also the result of an $8.8 million decline in favorable impacts from interest rate derivative activity, a $6.2 million decline in interest income and $0.6 million increase in debt issuance cost and debt discount amortization. Partially offsetting these factors was a $3.3 million increase in capitalized interest. The weighted average interest rate on our outstanding debt was 8.19% and 8.20% at June 30, 2024 and 2023, respectively.

Loss on Refinancing of Debt

Loss on refinancing of debt for the six months ended June 30, 2024 was $24.1 million and occurred primarily in connection with the refinancing our of our capital structure in May 2024. The refinancing activity resulted in the write off of certain unamortized debt issuance costs and discounts on the Term Loans due 2026. In addition, certain new debt issuance costs and discounts were expensed upon the issuance of the Term Loan and Secured Notes due 2031. Loss on refinancing of debt for the six months ended June 30, 2024 also included the write off of $0.7 million of unamortized debt issuance costs attributable to the Revolving Credit Facility in connection with Amendment No. 3 to the Revolving Credit Facility.

Foreign Exchange (Gain) Loss

Foreign exchange gain was $1.2 million for the six months ended June 30, 2024 as compared to a $0.8 million loss in the six months ended June 30, 2023. The change in foreign exchange loss in our Consolidated Statements of Operations and Comprehensive Income (Loss) mainly relates to short-term losses (offset by short-term gains) on sales denominated in currencies other than the functional currency of our operating entities. As described in Note 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 Income, Net

Other income, net was $1.2 million for the six months ended June 30, 2024 compared to $3.7 million for the six months ended June 30, 2023. The majority of the variance stemmed from a decline in the fair value of Nordion’s embedded derivatives in the six months ended June 30, 2024, resulting in a decrease in other income of $2.5 million compared to the same the period in the prior year.

Provision for Income Taxes

Provision for income taxes decreased $2.5 million to a net provision of $11.1 million for the six months ended June 30, 2024 as compared to $13.5 million in the six months ended June 30, 2023. The change was primarily attributable to lower pre-tax income for the six months ended June 30, 2024 compared to the six months ended June 30, 2023, partially offset by an increase in the valuation allowance against our excess interest expense carryforward balance.

Provision for income taxes for the six months ended June 30, 2024 differed from the statutory rate due to the impact of 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 six months ended June 30, 2023 differed from the statutory rate primarily due to a net increase in the foreign differential and GILTI.

Net Income, Adjusted Net Income and Adjusted EBITDA

Net income for the six months ended June 30, 2024 was $15.1 million, as compared to net income of $26.4 million for the six months ended June 30, 2023 due to the factors described above. Adjusted Net Income was $90.8 million for the six months ended June 30, 2024, as compared to $91.4 million for the six months ended June 30, 2023, and Adjusted EBITDA was $249.3 million for the six months ended June 30, 2024, as compared to $227.0 million for the six months ended June 30, 2023. 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 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, 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 refinancing of debt incurred in connection with refinancing or early extinguishment of long-term debt;
• expenses incurred in connection with the secondary offering of our common stock;
• 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 write-off of unamortized debt issuance costs and discounts, as well as certain other costs incurred related to the Refinancing Term Loans and the Secured Notes. The six months ended June 30, 2024 includes $0.7 million of debt refinancing costs related to Amendment No. 3 to the Senior Secured Credit Facilities.

(c) 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.

(d) 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 six months ended June 30, 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.

(e) Represents litigation and other professional fees associated with our EO sterilization facilities. Amounts presented for the three and six months ended June 30, 2023 have been adjusted to exclude interest expense, net associated with Term Loan B due 2026 attributable to the loan proceeds that were used to fund the $408.0 million Illinois EO litigation settlement.

(f) Represents expenses incurred in connection with the secondary offering of our common stock that closed on March 4, 2024.

(g) 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.

(h) 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.

(i) Interest expense, net presented in this reconciliation for the three and six months ended June 30, 2023 has been adjusted to conform to the current year presentation to include interest expense, net on Term Loan B due 2026 attributable to the loan proceeds that were used to fund the $408.0 million Illinois EO litigation settlement.

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

(k) 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 (h).

(l) $23.4 million and $24.4 million of the adjustments for the three months ended June 30, 2024 and 2023, respectively, and $47.2 million of the adjustments for the six months ended June 30, 2024 and 2023, 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 June 30, 2024 and 2023

The following tables compare segment net revenue and segment income for the three months ended June 30, 2024 to the three months ended June 30, 2023:

Net Revenues by Segment

Sterigenics net revenues were $176.4 million for the three months ended June 30, 2024, an increase of $9.8 million, or 5.9%, as compared to the three months ended June 30, 2023. The increase reflects favorable impacts from pricing of 4.9% as well as higher volume and changes in mix of 1.4%, partially offset by 0.4% due to unfavorable changes in foreign currency exchange rates.

Nordion net revenues were $41.2 million for the three months ended June 30, 2024, an increase of $9.3 million, or 29.0%, as compared to the three months ended June 30, 2023. The timing of reactor harvest schedules resulted in favorable volume and mix of 26.5%, which was a primary driver for net revenue, and favorable pricing of 3.8% also drove improvement. Partially offsetting this increase was an unfavorable impact of 1.3% from changes in foreign currency exchange rates.

Nelson Labs net revenues were $59.0 million for the three months ended June 30, 2024, an increase of $2.3 million, or 4.0%, as compared to the three months ended June 30, 2023. The increase was attributable to favorable pricing impacts of 3.0% as well as volume improvements and changes in mix of 1.4%. Partially offsetting this increase was an unfavorable impact from foreign currency exchange rates of 0.4%.

Segment Income

Sterigenics segment income was $96.8 million for the three months ended June 30, 2024, an increase of $5.3 million, or 5.8%, as compared to the three months ended June 30, 2023. The increase in segment income was primarily a result of favorable customer pricing, volume and changes in mix, partially offset by inflation.

Nordion segment income was $23.4 million for the three months ended June 30, 2024, an increase of $5.6 million, or 31.7%, as compared to the three months ended June 30, 2023. The timing of reactor harvest schedules was a primary driver for the increase in segment income and segment income margin, as well as favorable pricing.

Nelson Labs segment income was $17.1 million for the three months ended June 30, 2024, a decrease of $2.1 million, or 11.0%, as compared to the three months ended June 30, 2023. The decrease in segment income and segment income margin was primarily due to the impacts of volume and mix, as well as higher labor costs, partially offset by favorable pricing.

Segment Results for the Six Months Ended June 30, 2024 and 2023

The following tables compare segment net revenue and segment income for the six months ended June 30, 2024 to the six months ended June 30, 2023:

Net Revenues by Segment

Sterigenics net revenues were $342.9 million for the six months ended June 30, 2024, an increase of $16.3 million, or 5.0%, as compared to the six months ended June 30, 2023. The increase was primarily attributable to favorable impacts from pricing of 4.9% and changes in foreign currency exchange rates of 0.2%.

Nordion net revenues were $65.3 million for the six months ended June 30, 2024, an increase of $24.7 million, or 61.0%, as compared to the six months ended June 30, 2023. The timing of reactor harvest schedules resulted in favorable volumes and changes in mix of 58.8%, and a favorable impact from pricing of 3.2% also drove improvement. Partially offsetting these factors was an unfavorable impact of 1.0% from changes in foreign exchange rates.

Nelson Labs net revenues were $116.7 million for the six months ended June 30, 2024, an increase of $7.9 million, or 7.3%, as compared to the six months ended June 30, 2023. The change was attributable to increases in volume and changes in mix of 4.3% coupled with a favorable impact from pricing of 3.0%.

Segment Income

Sterigenics segment income was $182.6 million for the six months ended June 30, 2024, an increase of $8.3 million, or 4.8%, as compared to the six months ended June 30, 2023. The increase in segment income was driven primarily by favorable customer pricing, partially offset by inflation.

Nordion segment income was $34.2 million for the six months ended June 30, 2024, an increase of $14.9 million, or 77.1%, as compared to the six months ended June 30, 2023. The timing of reactor harvest schedules was a primary driver for the increase in segment income and segment income margin.

Nelson Labs segment income was $32.5 million for the six months ended June 30, 2024, a decrease of $0.9 million, or 2.6%, as compared to the six months ended June 30, 2023. The decrease in segment income and segment income margin was primarily due to the impact of volume and mix, as well as higher labor costs, partially offset by 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 June 30, 2024, we had $246.1 million of unrestricted cash and cash equivalents. This is a decrease of $50.3 million from the balance at December 31, 2023. The decrease in unrestricted cash and cash equivalents is mainly attributable to the $35.0 million payment of the Atlanta settlement in January 2024 and the $30.2 million payment in debt issuance costs and discounts associated with the issuance of the Refinancing Term Loans and Secured Notes in May 2024. Our foreign subsidiaries held cash of approximately $238.1 million at June 30, 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. Amendment No. 3 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 discussed below, on May 30, 2024 the Company and SHH closed on the Refinancing Term Loans in an aggregate principal amount of $1,509.4 million as well as an issuance of Secured Notes in an aggregate principal amount of $750.0 million (collectively, the “Financings”), both of which mature in 2031. The Company used the net proceeds from the Financings, along with cash on hand, to refinance its existing $1,763.1 million Term Loan and $496.3 million Term Loan due 2026.

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 and the foreseeable future thereafter. Our primary long-term liquidity requirements beyond the next 12 months will be to service our debt, make capital expenditures, and fund suitable business acquisitions. As of June 30, 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 June 30, 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”, “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 six months ended June 30, 2024, our capital expenditures amounted to $76.8 million, compared to $98.1 million for the six months ended June 30, 2023.

Cash Flow Information

Operating activities

Cash flows from operating activities increased $373.7 million to net cash provided of $71.0 million in the six months ended June 30, 2024 compared to $302.7 million of net cash used in operating activities for the six months ended June 30, 2023. The change in overall cash flows from operating activities was primarily due to the timing of the release of the $407.7 million Illinois settlement funds on June 30, 2023 and the release of the $35.0 million Atlanta settlement funds in January 2024.

Investing activities

Cash used by investing activities decreased $21.3 million to net cash used of $76.8 million in the six months ended June 30, 2024 compared to $98.1 million for the six months ended June 30, 2024. The variance was primarily driven by a decrease in cash paid for capital expenditures of $21.3 million in the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Financing activities

Cash used in financing activities was $41.4 million for the six months ended June 30, 2024 compared to $273.2 million of cash provided by financing activities for the six months ended June 30, 2023. The difference was mainly attributable to $500.0 million in proceeds from the issuance of Term Loan B due 2026 on February 23, 2023, partially offset by the $200.0 million paydown of the outstanding balance on the Revolving Credit Facility concurrent with the issuance of Term Loan B due 2026. Additionally, in the six months ended June 30, 2024, the Company paid $6.7 million to acquire certain facilities through the settlement of a finance lease and paid $5.5 million of incremental debt issuance costs as compared to the comparable period of the prior year.

Debt Facilities

Senior Secured Credit Facilities

On December 13, 2019, SHH, our wholly-owned subsidiary, entered into the Senior Secured Credit Facilities, consisting of both the Term Loan and the Revolving Credit Facility pursuant to the Credit Agreement. 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.

On May 30, 2024, the Company and SHH entered into Amendment No. 4 to the Senior Secured Credit Facilities. Among other changes, Amendment No. 4 provides for the Refinancing Term Loans to SHH in an aggregate principal amount of $1,509.4 million. Pursuant to Amendment No. 4, the Refinancing Term Loans shall have an applicable interest rate margin per annum equal to (i) ABR plus 2.25% for ABR Loans (as defined in the Credit Agreement), (ii) daily simple SOFR plus 3.25% for RFR Loans (as defined in the Credit Agreement) and (iii) Term SOFR plus 3.25% for Term Benchmark Loans (as defined in the Credit Agreement), in each case with a 0.00% applicable floor and the applicable interest rate margin shall be subject to a pricing step-down of 0.25% when the Senior Secured Leverage Ratio (as defined in the Credit Agreement) is less than or equal to 3.30:1.00. The Refinancing Term Loans are also subject to a “soft call” premium of 1.00% for certain repricing transactions with respect to the Refinancing Term Loans that occur within the six-month period after the effective date of Amendment No. 4. The Refinancing Term Loans amortize at a rate of 1.00% per annum and mature on May 30, 2031. The weighted average interest rate on borrowings under the Refinancing Term Loans for the three months ended June 30, 2024 was 8.58%.

On May 30, 2024, SHH, the Company, the Guarantors, and Wilmington Trust, National Association, as trustee, paying agent, registrar, transfer agent and notes collateral agent, entered into the Indenture governing SHH’s newly issued $750.0 million aggregate principal amount of 7.375% Secured Notes. The Secured Notes will pay interest semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2024, at a rate of 7.375% per year, and will mature on June 1, 2031. The Secured Notes may be redeemed, at any time or from time to time, in whole or in part, on or after June 1, 2027 at the redemption prices specified in the Indenture, together with accrued and unpaid interest, if any, thereon to, but excluding, the redemption date. At any time or from time to time, prior to June 1, 2027, the Secured Notes may be redeemed, in whole or in part, at a redemption price equal to 100% of the aggregate principal amount thereof plus a make-whole premium, together with accrued and unpaid interest, if any, thereon to, but excluding, the redemption date. In addition, at any time or from time to time, prior to June 1, 2027, SHH may redeem up to 40% of the aggregate principal amount of the Secured Notes (including any additional Secured Notes issued under the Indenture) with an amount not to exceed the net cash proceeds from certain equity offerings at a redemption price equal to 107.375% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, thereon to, but excluding, the redemption date. Further, at any time or from time to time, on or before June 1, 2027, SHH may redeem up to 10% of the then outstanding aggregate principal amount of Secured Notes (including any additional Secured Notes issued under the Indenture) during each of the twelve-month periods after the issue date, at a redemption price equal to 103% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, thereon to, but excluding, the redemption date.

The obligations under the Indenture are secured pursuant to a security agreement, dated as of May 30, 2024, by and among SHH, the Company, the other grantors party thereto, and Wilmington Trust, National Association (the “Security Agreement”), as may be amended from time to time, and related financing statements.

The Company used the combined net proceeds from the Refinancing Terms Loans and Secured Notes, along with cash on hand, to refinance its existing $1,763.1 million Term Loan due 2026 and $496.3 million Term Loan B due 2026.

On March 1, 2024, the Company and SHH entered into Amendment No. 3 to the Revolving Credit Facility. Among other changes, Amendment No. 3 provides (i) for new commitments under the existing Revolving Credit Facility to replace the 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 March 1, 2029.

The Senior Secured Credit Facilities and the Indenture contain additional covenants that, among other things, restrict, subject to certain exceptions, limitations and qualifications, our ability and the ability of our restricted subsidiaries to engage in certain activities, such as incur additional 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 the Indenture. The Senior Secured Credit Facilities and the Indenture also contain certain customary affirmative covenants and events of default, including upon a change of control. In addition, an event of default under the Senior Secured Credit Facilities and the Indenture 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 the greater of (i) $162.6 million or (ii) 30.0% of consolidated EBITDA or LTM EBITDA (as defined in the Credit Agreement and the Indenture, respectively) and the judgments were not stayed or remained undischarged for a period of 60 consecutive days. As of June 30, 2024, we were in compliance with all of the covenants under the Senior Secured Credit Facilities and the Indenture.

All of SHH’s obligations under the Senior Secured Credit Facilities and the Indenture 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 the Indenture, 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, the Indenture and the Security Agreement.

Outstanding letters of credit are collateralized by encumbrances against the Revolving Credit Facility and the collateral pledged thereunder, or by cash placed on deposit with the issuing bank. As of June 30, 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 2023 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 10-K. These market risks have not materially changed for the three and six months ended June 30, 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 June 30, 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.

There have been no material changes to the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” of our 2023 10-K filed with the SEC on February 27, 2024, and Part II, Item 1A,“Risk Factors,” of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2024, filed with the SEC on May 2, 2024.