Sotera Health Co (SHC) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read this Management’s Discussion and Analysis (“MD&A”) in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This MD&A 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 Item 1A, “Risk Factors” and elsewhere in this Annual Report on 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. In 2024, our customers included over 40 of the top 50 medical device companies and nine of the top ten global pharmaceutical companies (based on revenue). Our services are an essential aspect of our customers’ manufacturing processes 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.
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We are a trusted partner to approximately 5,000 customers in over 50 countries. We strive to give our customers confidence that their products meet regulatory, safety and effectiveness requirements. With our industry-recognized scientific and technological expertise, we help to promote the safety of millions of patients and healthcare practitioners around the world every year. Across our 62 facilities worldwide, we have over 3,000 employees who are dedicated to safety and quality.
We serve our customers throughout their product lifecycles, from product design to manufacturing and delivery, helping to promote the sterility, effectiveness and safety of their products for the end user. We operate across two core businesses: sterilization services and lab services. Each of our businesses has a longstanding record and is a leader in its respective market, supported and connected by our core capabilities including deep end market, regulatory, technical and logistics expertise. 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. This provides us with additional insights and allows us to better serve our customers. For financial reporting purposes, our sterilization services business breaks out into two reportable segments, Sterigenics and Nordion, and our lab services business constitutes a third reportable segment, Nelson Labs.
For the year ended December 31, 2024, we recorded net revenues of $1,100.4 million, net income of $44.4 million, Adjusted Net Income of $198.5 million and Adjusted EBITDA of $548.6 million. Adjusted Net Income and Adjusted EBITDA are financial measures not based on any standardized methodology prescribed by U.S. Generally Accepted Accounting Principles (“GAAP”). For the definition of Adjusted Net Income and Adjusted EBITDA and the reconciliation of these non-GAAP measures from net income (loss), please see “Non-GAAP Financial Measures.”
TRENDS AND KEY FACTORS AFFECTING OUR RESULTS OF OPERATIONS
We expect that our performance and financial condition will continue to be driven by the key trends impacting our industries, customers and their end markets as outlined in Item 1, “Business.” In addition, we believe the following trends and key factors have underpinned our recent operating results and may continue to affect our performance and financial condition in future periods.
•Business and market conditions. Consolidated net revenues and Adjusted EBITDA for the year ended December 31, 2024 increased from the year ended December 31, 2023, which was primarily a result of favorable pricing and improvements in volume and mix across all three reportable segments, partially offset by unfavorable changes in foreign currency exchanges rates.
As discussed in Item 1A, “Risk Factors”, 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 in the year ended December 31, 2024.
•Investment initiatives. We continue to advance our growth-related investments, including our two active capacity expansion projects within the Sterigenics segment, Co-60 development projects in the Nordion segment and lab expansion efforts to support pharma testing services in the Nelson Labs segment.
•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 and Vernon, California and our former facility in Willowbrook, Illinois. Additional EO lawsuits have been threatened relating to Sterigenics’ former facility in Willowbrook and existing facilities in Atlanta, Georgia; Charlotte, North Carolina; Grand Prairie, Texas; and Vernon, California and may be filed in the future relating to these or Sterigenics’ other EO facilities; these threats of additional EO lawsuits are comparable to threats that have similarly been made against other companies within our industry. 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 Item 3, “Legal Proceedings” and Note 19, “Commitments and Contingencies,” to our consolidated financial statements.
For the years ended December 31, 2024, 2023 and 2022, we recorded costs of $32.7 million, $45.3 million and $72.6 million, respectively, representing professional fees and other expenses related to litigation associated with our EO sterilization facilities.
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•Borrowings, financing costs 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 $1,509.4 million 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 previously outstanding term loans due December 2026.
COMPONENTS OF OUR RESULTS OF OPERATIONS
Net Revenues
Service revenues primarily consist of revenue generated from contract sterilization and lab testing and advisory services within our Sterigenics and Nelson Labs segments, respectively. Service revenues also primarily consist of Co-60 installation and disposal revenues and gamma irradiation system refurbishments and installation services within our Nordion segment. Product revenues primarily consist of revenues generated from sales of Co-60 radiation sources and gamma irradiation systems. Provisions for discounts, rebates to customers, and other adjustments may be provided for as reductions in net revenues. Refunds, returns, warranties and other related obligations are not material to any of our business units, nor do we intend to incur material incremental costs to secure customer contracts.
Cost of Revenues
Our cost of revenues consists primarily of direct materials, utilities, labor and related benefit costs, and depreciation and amortization. Although the cost of utilities and direct materials can fluctuate, the remaining components of cost of revenues are generally more stable. Direct material costs relating to service revenues primarily includes EO gas, nitrogen gas and Co-60. The physical decay of Co-60 assets is included within depreciation expense as a cost of revenue. Direct material costs relating to product revenues also include the costs associated with acquiring Co-60 in finished or semi-finished form, acquiring Co-59 in a form ready for insertion into reactors for conversion into Co-60, the reactor time and associated services to convert Co-59 into Co-60, and parts and equipment associated with maintaining gamma irradiation systems.
Operating Expenses
SG&A Expenses
Selling, general and administrative expenses (“SG&A”) primarily consists of compensation and benefits costs and general operating and administrative expenses, including professional service fees (which include finance and legal costs), travel and entertainment expenses, and other general and administrative expenses. Share-based compensation expense is also included in SG&A.
Amortization of Intangible Assets
Amortization of intangible assets primarily consists of expense associated with customer relationship intangible assets, the majority of which relate to the fair values attributed to these assets upon the recapitalization of the Company in connection with the acquisition by the Sponsors in 2015. These customer relationship intangible assets were initially assigned a weighted average useful life of ten years and have a remaining useful life of approximately one year. These customer relationship intangible assets accounted for approximately $48.4 million of our current annual amortization expense and are expected to be fully amortized in 2025. Amortization expense fluctuates when we have an acquisition, disposition, impairment charge, or as their useful lives expire.
Operating Income
Operating income represents gross profit, less SG&A and amortization of intangible assets.
Interest Expense, Net
Interest expense, net, represents interest paid or accruing on our outstanding indebtedness and the amortization of debt discount and debt issuance costs. Interest expense, net is primarily affected by changes in average outstanding indebtedness (including finance lease obligations) and variable interest rates. We present interest expense net of interest income, which primarily consists of interest earned on cash on hand.
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Loss on Refinancing of Debt
Loss on refinancing of debt for the year ended December 31, 2024 occurred in connection with the refinancing of our capital structure in May 2024 and Amendment No. 3 (as defined below) to Revolving Credit Facility. The refinancing activity primarily 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.
Georgia EO litigation settlement
On October 16, 2023, the Company reached an agreement to resolve 79 EO claims in the State of Georgia. Under the terms of the agreements, the Company paid $35.0 million to settle the claims.
Illinois EO litigation settlement
On January 9, 2023, the Company reached agreements to settle approximately 880 pending and threatened EO claims in Illinois. Under the terms of the agreements, the Company paid $407.7 million to settle the claims.
Impairment of investment in unconsolidated affiliate
During the year ended December 31, 2022, we recorded an impairment charge of $9.6 million related to a joint venture investment, which was acquired as part of the 2020 acquisition of Iotron Industries Canada, Inc.. Due to a shift in business strategy, the joint venture did not proceed. Based on these facts and circumstances, we concluded that the investment was impaired as of June 30, 2022.
Other Income, Net
Other income, net primarily consists of changes in the fair value of the embedded derivatives in Nordion’s contracts, the net impact of pension related benefits and the income related to deferred income on a lease associated with the 2018 divestiture of the Medical Isotopes business.
Provision (Benefit) for Income Taxes
Provision for income taxes primarily consists of income taxes in foreign jurisdictions and U.S. federal and state income taxes.
Constant Currency Sales Growth (Non-GAAP)
“Constant currency” is a non-GAAP financial measure we use to assess performance excluding the impact of foreign currency exchange rate changes. Constant currency sales growth is calculated by translating prior year sales in local currency at the average exchange rates applicable for the current period. The translated results are then used to determine year-over-year percentage increases or decreases. We generally refer to such amounts calculated on a constant currency basis as excluding the impact of foreign currency exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with U.S. GAAP.
Adjusted Net Income and Adjusted EBITDA (Non-GAAP)
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 metric for 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.
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For more information regarding our definition and calculation of Adjusted Net Income and Adjusted EBITDA, including information about its limitations as a tool for analysis and reconciliation to the most directly comparable financial measures calculated in accordance with GAAP, please see “Non-GAAP Financial Measures” within this Item 7.
Segment Income
Segment income is the primary earnings measure we use to evaluate the performance of our reportable segments, as disclosed in Note 21, “Segment and Geographic Information” to our consolidated financial statements. Costs associated with support functions that are not directly associated with one of the three reportable segments, such as corporate operating expenses for executive management, accounting, information technology, legal, human resources, treasury, investor relations, corporate development, tax, purchasing, and marketing, are allocated to the segments based on net revenue. Corporate operating expenses that are directly incurred by a segment are reflected in each segment’s income. Segment income excludes certain items which are included in “Income (loss) before taxes” as determined in our Consolidated Statements of Operations and Comprehensive Income (Loss).
CONSOLIDATED RESULTS OF OPERATIONS
The following section summarizes the consolidated results of operations for the years ended December 31, 2024 and 2023. The discussion of the consolidated results of operation for the years ended December 31, 2023 and 2022 are presented within our Annual Report on Form 10-K for the year ended December 31, 2023 under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Consolidated Results of Operations.”
Year Ended December 31, 2024 as compared to Year Ended December 31, 2023
The following table sets forth the components of our results of operations for the years ended December 31, 2024 and 2023.
| (thousands of U.S. dollars) | 2024 | 2023 | $ Change | % Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total net revenues | $ | 1,100,441 | $ | 1,049,288 | $ | 51,153 | 4.9 | % | ||||||
| Total cost of revenues | 498,146 | 472,130 | 26,016 | 5.5 | % | |||||||||
| Total operating expenses | 304,669 | 300,466 | 4,203 | 1.4 | % | |||||||||
| Operating income | 297,626 | 276,692 | 20,934 | 7.6 | % | |||||||||
| Net income | 44,398 | 51,376 | (6,978) | (13.6 | %) | |||||||||
| Adjusted Net Income(1) | 198,500 | 204,326 | (5,826) | (2.9) | % | |||||||||
| Adjusted EBITDA(1) | 548,574 | 528,029 | 20,545 | 3.9 | % |
(1)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 year ended December 31, 2024 to the year ended December 31, 2023.
| (thousands of U.S. dollars)Net revenues for the year ended December 31, | 2024 | 2023 | $ Change | % Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Service | $ | 941,822 | $ | 905,598 | $ | 36,224 | 4.0 | % | ||||||
| Product | 158,619 | 143,690 | 14,929 | 10.4 | % | |||||||||
| Total net revenues | $ | 1,100,441 | $ | 1,049,288 | $ | 51,153 | 4.9 | % |
Net revenues were $1,100.4 million in the year ended December 31, 2024, an increase of $51.2 million, or 4.9%, as compared with the prior year. Net revenues in the year ended December 31, 2024 increased approximately 5.4% compared with the same period in 2023 on a constant currency basis.
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Service revenues
Service revenues increased $36.2 million, or 4.0%, to $941.8 million in 2024 as compared to $905.6 million in 2023. Favorable pricing of $30.6 million and $6.7 million in the Sterigenics and Nelson Labs segments, respectively, coupled with an increase in service revenue volume and mix of $2.2 million and $1.0 million in the Sterigenics and Nelson Labs segments, respectively, were the primary drivers of service revenue growth. Partially offsetting these growth factors was a $2.2 million unfavorable impact from changes in foreign currency exchange rates across all segments as well as a decline in service revenue of $2.1 million in the Nordion segment.
Product revenues
Product revenues increased $14.9 million, or 10.4%, to $158.6 million in the year ended December 31, 2024 as compared to $143.7 million in the year ended December 31, 2023. Volume and mix growth of $10.3 million coupled with favorable pricing of $7.3 million were the primary drivers of the increase in product revenues. Partially offsetting these growth factors was an unfavorable change in foreign currency exchange rates of $2.7 million.
Total Cost of Revenues
The following table compares our cost of revenues by type for the year ended December 31, 2024 to the year ended December 31, 2023.
| (thousands of U.S. dollars)Cost of revenues for the year ended December 31, | 2024 | 2023 | $ Change | % Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Service | $ | 439,543 | $ | 418,611 | $ | 20,932 | 5.0 | % | ||||||
| Product | 58,603 | 53,519 | 5,084 | 9.5 | % | |||||||||
| Total cost of revenues | $ | 498,146 | $ | 472,130 | $ | 26,016 | 5.5 | % |
Total cost of revenues accounted for approximately 45.3% and 45.0% of our consolidated net revenues for the years ended December 31, 2024 and 2023, respectively.
Cost of service revenues
Cost of service revenues increased $20.9 million for the year ended December 31, 2024 as compared to the prior year. The primary drivers of the increase in cost of service revenues were higher employee compensation costs of $10.1 million, a $5.1 million increase in depreciation related to capital assets recently placed in service and an increase in certain facility repairs and maintenance costs of $3.3 million. The remaining difference was primarily driven by other inflationary pressures. This was partially offset by favorable changes in foreign currency exchange rates of $1.2 million.
Cost of product revenues
Cost of product revenues increased $5.1 million, or 9.5%, for the year ended December 31, 2024 as compared to the prior year. The increase was primarily a result of higher volumes of Co-60 shipments and supplier mix, which resulted in increases in direct material and material transportation costs of $4.8 million. Changes in foreign currency exchange rates resulted in a $0.8 million favorable impact to cost of product revenues.
Operating Expenses
The following table compares our operating expenses for the year ended December 31, 2024 to the year ended December 31, 2023:
| (thousands of U.S. dollars)Operating expenses for the year ended December 31, | 2024 | 2023 | $ Change | % Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Selling, general and administrative expenses | $ | 242,630 | $ | 236,667 | $ | 5,963 | 2.5 | % | ||||||
| Amortization of intangible assets | 62,039 | 63,799 | (1,760) | (2.8) | % | |||||||||
| Total operating expenses | $ | 304,669 | $ | 300,466 | $ | 4,203 | 1.4 | % |
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Operating expenses accounted for approximately 27.7% and 28.6% of our consolidated net revenues for the years ended December 31, 2024 and 2023, respectively.
SG&A
SG&A increased $6.0 million, or 2.5%, for the year ended December 31, 2024 as compared to the prior year. The increase was driven primarily by $9.9 million of incremental SG&A compensation related costs and a $4.5 million increase in share-based compensation expense, partially offset by a $9.5 million decrease in legal and other professional services expenses.
Amortization of intangible assets
Amortization of intangible assets decreased $1.8 million, or 2.8%, for the year ended December 31, 2024, compared to the prior year, due primarily to changes in foreign currency exchange rates.
Interest Expense, Net
Interest expense, net increased $21.8 million, or 15.3%, for the year ended December 31, 2024 as compared to the prior year. Lower favorability from interest rate derivative activity of $15.0 million coupled with an $8.4 million decline in interest income on cash and cash equivalents on deposit at financial institutions were the primary drivers of the increase in interest expense, net.
Loss on Refinancing of Debt
Loss on refinancing of debt for the year ended December 31, 2024 was $24.2 million and primarily occurred in connection with the refinancing of our capital structure in May 2024 and Amendment No. 3 to Revolving Credit Facility. 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.
Georgia EO litigation settlement
On October 16, 2023, the Company reached an agreement to resolve 79 pending EO claims in the State of Georgia. Under the terms of the agreement, the Company paid $35.0 million in January 2024 to settle the claims.
Foreign Exchange Loss
Foreign exchange loss was $0.2 million for the year ended December 31, 2024 and 2023. Foreign exchange gains and losses in our Consolidated Statements of Operations and Comprehensive Income (Loss) mainly relates to short-term gains and losses on transactions denominated in currencies other than the functional currency of our operating entities. As described in Note 20, “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 $5.3 million for the year ended December 31, 2024, a decrease of $2.1 million, or 28.0%, as compared to the prior year. The fluctuation was primarily driven by a $3.9 million unfavorable change in the fair value of embedded derivatives in Nordion’s purchase and sales contracts, partially offset by $1.1 million of other income related to a tax credit incentive.
Provision for Income Taxes
Provision for income taxes was $69.5 million for the year ended December 31, 2024 as compared to $54.7 million in the prior year. The change was primarily attributable to higher pre-tax income of $113.9 million in the year ended December 31, 2024 compared to $106.0 million for the year ended December 31, 2023, and an incremental increase in the valuation allowance attributable to the limitation on the deductibility of interest expense, partially offset by a decrease in Global Intangible Low Taxed Income (“GILTI”).
Provision for income taxes for the year ended December 31, 2024 differed from the statutory rate of 21% primarily due to a net increase in the valuation allowance attributable to the limitation on the deductibility of interest expense and the foreign rate
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differential, partially offset by a benefit for state income taxes. The provision for income taxes for the year ended December 31, 2023 differed from the statutory rate of 21% primarily due to an increase in the the valuation allowance attributable to the limitation on the deductibility of interest expense as well as federal and state net operating loss carryforward balances, the impact of the foreign rate differential and GILTI, partially offset by a benefit for state income taxes.
Net Income, Adjusted Net Income and Adjusted EBITDA
Net income for the year ended December 31, 2024 was $44.4 million, as compared to net income of $51.4 million for the year ended December 31, 2023, primarily due to the factors described above. Adjusted Net Income was $198.5 million for the year ended December 31, 2024, as compared to $204.3 million for the year ended December 31, 2023, primarily due to the factors described above. Adjusted EBITDA was $548.6 million for the year ended December 31, 2024, as compared to $528.0 million for the year ended December 31, 2023, primarily 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 (loss) before amortization and certain other adjustments that we do not consider in our evaluation of our ongoing operating performance from period to period as discussed further below. We define Adjusted EBITDA as Adjusted Net Income before interest expense, depreciation (including depreciation of Co-60 used in our operations) and income tax provision applicable to Adjusted Net Income.
We use Adjusted Net Income and Adjusted EBITDA, non-GAAP financial measures, as the principal measures of our operating performance. Management believes Adjusted Net Income and Adjusted EBITDA are useful because they allow management to more effectively evaluate our operating performance and compare the results of our operations from period to period without the impact of certain non-cash items and non-routine items that we do not expect to continue at the same level in the future and other items that are not core to our operations. We believe that these measures are useful to our investors because they provide a more complete understanding of the factors and trends affecting our business than could be obtained absent this disclosure. In addition, we believe Adjusted Net Income and Adjusted EBITDA will assist investors in making comparisons to our historical operating results and analyzing the underlying performance of our operations for the periods presented. Our management also uses Adjusted Net Income and Adjusted EBITDA in their financial analysis and operational decision-making, and Adjusted EBITDA serves as the basis for the metric we utilize to determine attainment of our primary annual incentive program. Adjusted Net Income and Adjusted EBITDA may be calculated differently from, and therefore may not be comparable to, a similarly titled measure used by other companies.
Adjusted Net Income and Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. There are a number of limitations related to the use of Adjusted Net Income and Adjusted EBITDA rather than net income (loss), the nearest GAAP equivalent. For example, Adjusted Net Income and Adjusted EBITDA primarily exclude:
•certain recurring non-cash charges such as depreciation of fixed assets, although these assets may have to be replaced in the future, as well as amortization of acquired intangible assets and asset retirement obligations (“ARO”);
•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 and other shareholder activities;
•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 Vernon, California;
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•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 this presentation. 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 (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP to Adjusted Net Income and Adjusted EBITDA, for each of the periods indicated:
| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | |||||
| Net income | $ | 44,398 | $ | 51,376 | |||
| Amortization of intangible assets | 79,377 | 81,348 | |||||
| Share-based compensation(a) | 36,896 | 32,364 | |||||
| Loss on refinancing of debt(b) | 24,168 | — | |||||
| Loss (gain) on foreign currency and derivatives not designated as hedging instruments, net(c) | 2,448 | (1,552) | |||||
| Business optimization expenses(d) | 7,504 | 7,662 | |||||
| Professional services relating to EO sterilization facilities(e) | 32,694 | 45,312 | |||||
| Georgia EO litigation settlement(f) | — | 35,000 | |||||
| Secondary offering and other shareholder activities(g) | 1,864 | — | |||||
| Accretion of asset retirement obligations(h) | 2,638 | 2,413 | |||||
| Income tax benefit associated with pre-tax adjustments(i) | (33,487) | (49,597) | |||||
| Adjusted Net Income | 198,500 | 204,326 | |||||
| Interest expense, net(j) | 164,691 | 142,878 | |||||
| Depreciation(k) | 82,420 | 76,577 | |||||
| Income tax provision applicable to Adjusted Net Income(l) | 102,963 | 104,248 | |||||
| Adjusted EBITDA(m) | $ | 548,574 | $ | 528,029 |
(a)Represents share-based compensation expense to employees and Non-Employee Directors. See Note 15, “Share-Based Compensation” for further information.
(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 year ended December 31, 2024 also 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 year ended December 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.
(e)Represents litigation and other professional fees associated with our EO sterilization facilities. Amounts presented for the year ended December 31, 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 the cost to settle 79 pending EO claims in Georgia under a settlement entered into on December 21, 2023. See Note 19, “Commitments and Contingencies.”
(g)Represents expenses incurred in connection with secondary offerings of our common stock that closed on March 4, 2024 and September 6, 2024 and legal, consulting, and other fees associated with shareholder engagement.
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(h)Represents non-cash accretion of ARO related to Co-60 gamma and EO 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.
(i)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.
(j)Interest expense, net presented in this reconciliation for the year ended December 31, 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.
(k)Includes depreciation of Co-60 held at gamma irradiation sites. The year ended December 31, 2024 excludes accelerated depreciation associated with business optimization activities.
(l)Represents the difference between the income tax provision/benefit as determined under U.S. GAAP and the income tax benefit associated with pre-tax adjustments described in footnote (i).
(m)$97.1 million and $94.1 million of the adjustments for the year ended December 31, 2024 and 2023, respectively, are included in cost of revenues, primarily consisting of amortization of intangible assets, depreciation, and accretion of ARO.
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 (loss) before tax as determined in our Consolidated Statements of Operations and Comprehensive Income (Loss). The accounting policies for our reportable segments are the same as those for the consolidated Company.
Our Segments
Sterigenics
Our Sterigenics business provides outsourced terminal sterilization and irradiation services for the medical device, pharmaceutical, food safety and advanced applications markets using three major technologies: gamma irradiation, EO processing and E-beam irradiation.
Nordion
Our Nordion business 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 that we make 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. In most cases, 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.
Nelson Labs
Our Nelson Labs business provides outsourced microbiological and analytical chemistry testing and advisory services for the medical device and pharmaceutical industries.
For more information regarding our reportable segments please refer to Item 1. “Business” and Note 21, “Segment and Geographic Information” to our consolidated financial statements.
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Segment Results for the Years Ended December 31, 2024 and 2023
The following section summarizes the segment results for the years ended December 31, 2024 and 2023. The discussion of the segment results for the years ended December 31, 2023 and 2022 are presented within our Annual Report on Form 10-K for the year ended December 31, 2023 under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Segment Results for the years ended December 31, 2023 and 2022.”
The following tables compare segment net revenue and segment income for the year ended December 31, 2024 to the year ended December 31, 2023:
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | $ Change | % Change | ||||||||||
| Net Revenues | ||||||||||||||
| Sterigenics | $ | 697,853 | $ | 667,130 | $ | 30,723 | 4.6 | % | ||||||
| Nordion | 173,355 | 160,459 | 12,896 | 8.0 | % | |||||||||
| Nelson Labs | 229,233 | 221,699 | 7,534 | 3.4 | % | |||||||||
| Segment Income | ||||||||||||||
| Sterigenics | $ | 378,171 | $ | 362,212 | $ | 15,959 | 4.4 | % | ||||||
| Nordion | 101,220 | 96,678 | 4,542 | 4.7 | % | |||||||||
| Nelson Labs | 69,183 | 69,139 | 44 | 0.1 | % | |||||||||
| Segment Income Margin | ||||||||||||||
| Sterigenics | 54.2 | % | 54.3 | % | ||||||||||
| Nordion | 58.4 | % | 60.3 | % | ||||||||||
| Nelson Labs | 30.2 | % | 31.2 | % |
Net Revenues
Sterigenics net revenues were $697.9 million for the year ended December 31, 2024, an increase of $30.7 million, or 4.6%, as compared to the prior year. The increase was attributable to a favorable impact from pricing of 4.6% and changes in volume and mix of 0.3%, partially offset by unfavorable changes in foreign currency exchange rates of 0.3%.
Nordion net revenues were $173.4 million for the year ended December 31, 2024, an increase of $12.9 million, or 8.0%, as compared to the prior year. The increase was driven by growth from volume and mix and pricing of 4.9% and 5.2%, respectively, partially offset by unfavorable changes in foreign currency exchange rates of 2.1%.
Nelson Labs net revenues were $229.2 million for the year ended December 31, 2024, an increase of $7.5 million, or 3.4%, as compared to the prior year. The increase was attributable to a 3.0% favorable impact from pricing and 0.4% from changes in volume and mix.
Segment Income
Sterigenics segment income was $378.2 million for the year ended December 31, 2024, an increase of $16.0 million, or 4.4%, as compared to the prior year. The increase in segment income was driven mainly by favorable pricing, partially offset by inflation and certain facility repairs and maintenance costs.
Nordion segment income was $101.2 million for the year ended December 31, 2024, an increase of $4.5 million, or 4.7%, as compared to the prior year. The increase in segment income was driven primarily by favorable pricing and higher volumes and mix, partially offset by supplier mix. The decrease in segment income margin was driven by higher employee compensation costs and unfavorable mix.
Nelson Labs segment income was $69.2 million for the year ended December 31, 2024, an increase of 0.1%, as compared to the prior year. Pricing and labor productivity improvements resulted in a favorable impact to segment income during the year ended December 31, 2024 compared to the prior year. Partially offsetting this and negatively impacting segment income margin were increases in employee compensation costs and unfavorable mix.
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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 December 31, 2024, we had $278.9 million of cash and cash equivalents. This is a decrease of $22.8 million from the balance at December 31, 2023. The decrease in cash and cash equivalents was attributable to $179.0 million of purchases of property, plant and equipment, $50.6 million of cash used in financing activities and a $17.4 million decline due to changes in foreign currency exchange rates, partially offset by $224.2 million of cash provided by operating activities. Our foreign subsidiaries held cash of approximately $259.8 million at December 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.
Refer to “Debt Facilities” below within this Item, Note 9, “Long-Term Debt”, and Item 1A, “Risk Factors” - “Risks Related to Our Indebtedness and Liquidity” for additional information.
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 the terms and conditions of the Credit Agreement, including
with respect to the amount of commitments under the Revolving Credit Facility, which remain $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, both of which mature in 2031. The Company used the net proceeds from the Refinancing Term Loans and Secured Notes, along with cash on hand, to refinance its previously outstanding $1,763.1 million and $496.3 million Term Loans 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. Our primary long-term liquidity requirements beyond the next twelve months will be to service our debt, make capital expenditures, and fund suitable business acquisitions. As of December 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 December 31, 2024, our interest rate derivatives limit our cash flow exposure of our variable rate borrowings under the Term Loans. Refer to Note 20, “Financial Instruments and Financial Risk”, “Derivative Instruments” for additional information regarding the interest rate limits used to manage economic risks associated with our variable rate borrowings. Refer to Item 7A., “Quantitative and Qualitative Disclosures About Market Risk” 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 year ended December 31, 2024, our capital expenditures amounted to $179.1 million, compared to $215.0 million in the year ended December 31, 2023. Our capital expenditures for the year ended December 31, 2024 included approximately $32 million related to environmental facility enhancements.
In 2024, we expect to continue to invest in facility expansions, ongoing routine maintenance for existing facilities, and acquisition of Co-60 for use by our Sterigenics segment in its gamma irradiation facilities. In addition, we expect to invest in special projects related to development of new Co-60 supply sources and facility enhancements at our EO sterilization facilities. For 2025, it is estimated that approximately $46 million of capital expenditures will relate to environmental facility enhancements.
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Debt Facilities
Senior Secured Credit 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 (as amended through Amendment No. 4, 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 (“Amendment No. 4”) to the Senior Secured Credit Facilities. Among other changes, Amendment No. 4 provides for 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 Secured Overnight Financing Rate (“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% 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 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 year ended December 31, 2024 was 8.29%.
On May 30, 2024, SHH, the Company, certain subsidiaries of the Company (the “Guarantors”), and Wilmington Trust, National Association, as trustee, paying agent, registrar, transfer agent and notes collateral agent, entered into an Indenture (the “Indenture”) governing SHH’s $750.0 million aggregate principal amount of 7.375% senior secured notes due 2031 (the “Secured Notes”) issued in May 2024. 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 ending 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 on a first-lien basis by security interests in substantially all of the assets of SHH, the Company and the Guarantors (other than any excluded assets) that secure the Credit Agreement on a pari passu basis, subject to certain limitations, exceptions and permitted liens. These obligations 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 previously outstanding $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 (“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.
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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 December 31, 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 SHH and the 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 December 31, 2024, the Company had $14.0 of letters of credit issued against the Revolving Credit Facility, resulting in total availability under the Revolving Credit Facility of $409.8 million.
Term Loan Interest Rate Risk Management
The Company utilizes interest rate derivatives to reduce the variability of cash flows in the interest payments associated with our variable rate debt due to changes in SOFR. For additional information on the derivative instruments described above, refer to Note 20, “Financial Instruments and Financial Risk”, “Derivative Instruments.”
Cash Flow Information
The following section summarizes cash flow information for the years ended December 31, 2024 and 2023. Cash flow information for the years ended December 31, 2023 and 2022 are presented within our Annual Report on Form 10-K for the year ended December 31, 2023 under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”
Year Ended December 31, 2024 compared to the Year Ended December 31, 2023
| (thousands of U.S. dollars) | 2024 | 2023 | ||||
|---|---|---|---|---|---|---|
| Net Cash Provided by (Used in): | ||||||
| Operating activities | $ | 224,164 | $ | (147,732) | ||
| Investing activities | (178,996) | (214,906) | ||||
| Financing activities | (50,564) | 265,959 | ||||
| Effect of foreign currency exchange rate changes on cash and cash equivalents | (17,393) | 2,039 | ||||
| Net (decrease) increase in cash and cash equivalents, including restricted cash, during the period | $ | (22,789) | $ | (94,640) |
Operating activities
Net cash provided by operating activities increased $371.9 million to net cash provided of $224.2 million for the year ended December 31, 2024 as compared to net cash used in operating activities of $147.7 million for the prior year. The increase in net cash provided by operating activities in 2024 compared to the prior year was due mainly to the timing of cash outflows for the Illinois and Georgia EO litigation settlements. Approximately $407.7 million was paid in June 2023 for the settlements of the Illinois EO claims, whereas $35.0 million was paid in January 2024 for settlement of the Georgia EO claims.
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Investing activities
Net cash used in investing activities decreased $35.9 million to net cash used of $179.0 million in the year ended December 31, 2024 as compared to $214.9 million for the prior year. The variance was mainly driven by a decrease in capital expenditures of $35.9 million in the year ended December 31, 2024 compared to the prior year.
Financing activities
For the year ended December 31, 2024, net cash used in financing activities was $50.6 million compared to net cash provided by financing activities of $266.0 million for the year ended December 31, 2023 resulting in a net change of $316.5 million. The difference was mainly attributable to $5.0 million of debt repayments (net of debt proceeds) in the year ended December 31, 2024 as compared to $297.5 million of debt proceeds (net of repayments) in the year ended December 31, 2023 resulting in a $302.5 million net change in cash outflow. Cash outflows for debt issuance costs also increased $6.4 million during the year ended December 31, 2024 as compared to the prior year. In addition, a purchase option for a leased facility was exercised in the first quarter of 2024 resulting in a $6.7 million cash outflow.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table describes our significant contractual and other cash obligations as of December 31, 2024:
| Payments due by period | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (thousands of U.S. dollars) | Total | Less than1 Year | 2-3 Years | 4-5 Years | More than 5Years | |||||||||||||
| Long-term debt (a) | $ | 3,299,746 | $ | 183,748 | $ | 348,172 | $ | 362,490 | $ | 2,405,336 | ||||||||
| Lease obligations: | ||||||||||||||||||
| Finance (b) | 165,197 | 9,245 | 19,012 | 19,573 | 117,367 | |||||||||||||
| Operating (c) | 39,130 | 6,937 | 12,112 | 7,792 | 12,289 | |||||||||||||
| Supply and service obligations (d) | 2,219,136 | 60,291 | 113,279 | 106,600 | 1,938,966 | |||||||||||||
| Direct material costs (e) | 161,796 | 21,440 | 49,217 | 58,410 | 32,729 | |||||||||||||
| Total | $ | 5,885,005 | $ | 281,661 | $ | 541,792 | $ | 554,865 | $ | 4,506,687 |
(a)Represents principal and interest payments on the Senior Secured Credit Facilities and Secured Notes. We have calculated the interest payments on the Senior Secured Credit Facilities using an assumed range of 6.91% to 7.84% based on anticipated forward movements in SOFR and the fixed rate of 7.375% for the Secured Notes. In addition, interest payments include the impact of existing interest rate swaps described in Note 20, “Financial Instruments and Financial Risk” in the notes to consolidated financial statements.
(b)Consists of payments under our finance leases for various facilities and equipment.
(c)Represents minimum lease payments under our operating leases for several of our facilities and other property and equipment.
(d)Consists of our best estimate of our obligations under various supply and service agreements, primarily Co-60, that are enforceable and legally binding on us.
(e)Consists of our best estimate of our obligations to purchase EO gas under commitments that are enforceable and legally binding on us. We have excluded contracts to purchase energy and other supplies, which generally have terms of one year or less. Our contract to purchase EO gas in the U.S. requires us to purchase all our requirements from our supplier, and our contracts to purchase EO gas outside the U.S. generally require that we purchase a specified percentage of our requirements for our operations in the countries covered by those contracts. Although our EO gas contracts generally do not contain fixed minimum purchase volumes, we have calculated the amounts set forth in the table above based on the percentage of our requirements specified in the contracts and our budgeted purchase volumes for those periods.
At December 31, 2024 and 2023, we had $58.5 million and $67.3 million, respectively, of standby letters of credit, surety bonds and other bank guarantees outstanding, primarily in favor of local and state licensing authorities for future decommissioning costs, and to support the unfunded portion of our pension obligation. We are obligated to provide financial assurance to local and state licensing authorities for possible future decommissioning costs associated with the various facilities that hold Co-60. At December 31, 2024 and 2023, $49.1 million and $48.2 million, respectively, of the standby letters of credit and surety bonds referenced above were outstanding in favor of the various local and state licensing authorities in the event we defaulted on our decommissioning obligation.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following subsections describe our most critical accounting policies, estimates, and assumptions. Our discussion of critical accounting policies and estimates is intended to supplement, not duplicate, our summary of significant accounting policies so that readers will have greater insight into the uncertainties involved in these areas. Our accounting policies are more fully described in Note 1, “Significant Accounting Policies” to our consolidated financial statements.
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.
Revenue Recognition. The majority of our sales agreements contain performance obligations satisfied at a point in time when control of promised goods or services have transferred to our customers. Revenues recognized over time are generally accounted for using an input measure to determine progress completed as of the end of the period.
Refunds, returns, warranties and other related obligations are not material to any of our business units and we do not incur material incremental costs to secure customer contracts.
The Sterigenics segment provides outsourced terminal sterilization and irradiation services for the medical device, pharmaceutical, food safety and advanced applications markets. We typically have multi-year service contracts with our significant customers, and these sales contracts are primarily based on customers’ purchase orders. Given the relatively short turnaround times, performance obligations are generally satisfied at a point-in-time upon the completion of sterilization or irradiation processing and the approval of our quality assurance process, at which time the service is complete.
The Nordion segment is a provider of Co-60 and gamma irradiation systems, which are key components to the gamma sterilization process. Revenue from the sale of Co-60 radiation sources is recognized at a point-in-time upon satisfaction of our performance obligations for delivery/installation and disposal of existing sources. Revenue from the sale of gamma irradiation systems in our Nordion segment is recognized over time using an input measure of costs incurred and is immaterial to the overall business.
The Nelson Labs segment provides outsourced microbiological and analytical chemistry testing and advisory services for the medical device and pharmaceutical industries. We provide our customers mission-critical lab testing services, which assess the product quality, effectiveness, patient safety and end-to-end sterility of products. These services are necessary for our customers’ regulatory approvals, product releases and ongoing product performance evaluations. Nelson Labs services are generally provided on a fee-for-service or project basis, and we recognize revenues over time generally using an input measure of time incurred to determine progress completed at the end of the period. Revenue recognized over time in excess of the amount billed to the customer is recorded as a customer contract asset. When we receive consideration from a customer prior to transferring goods or services under the terms of a sales contract, we record deferred revenue, which represents a contract liability. We utilize our customer relationship management system to assess time incurred and the extent of project completion at the end of the period.
We do not capitalize sales commissions because substantially all of our sales commission programs have an amortization period of one year or less. Furthermore, costs to fulfill a contract are not material.
Provisions for discounts, rebates to customers, and other adjustments are provided for as reductions in net revenues in the period the related sale was recorded. Shipping and handling charges billed to customers are included in net revenues, and the related shipping and handling costs are included in cost of net revenues on the Consolidated Statements of Operations and Comprehensive Income (Loss). Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from net revenue.
Payment terms vary by the type and location of the customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. We do not evaluate whether the selling price contains a financing component for contracts that have a duration of less than one year.
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Goodwill and Other Indefinite-Lived Intangibles. Assets and liabilities of a business acquired are accounted for at their estimated fair values as of the acquisition date. Any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired is recorded as goodwill. We generally supplement management expertise with valuation specialists in performing appraisals to assist us in determining the fair values of assets acquired and liabilities assumed. These valuations require us to make estimates and assumptions, especially with respect to intangible assets. We generally amortize our intangible assets over their useful lives with the exception of indefinite lived intangible assets. We do not amortize goodwill, but we evaluate it annually for impairment. Therefore, the allocation of the purchase price to intangible assets and goodwill has a significant impact on future operating results.
Goodwill and other indefinite-lived intangible assets, primarily certain regulatory licenses and trade names, are tested for impairment annually as of October 1. If circumstances change during interim periods between annual tests that indicate that the carrying amount of such assets may not be recoverable, the Company tests such assets at an interim date for impairment. Factors which would necessitate an interim impairment assessment include prolonged negative industry or economic trends and significant underperformance relative to historical or projected future operating results.
At December 31, 2024, goodwill and intangible assets totaled $1,398.7 million, or 45.5% of our total assets. We consider the impairment analyses of these assets critical because of their quantitative significance to the Company and our segments.
Goodwill is assigned to our segments at December 31, 2024 as follows:
| (thousands of U.S. dollars) | Sterigenics | Nordion | Nelson Labs | Total | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Goodwill at December 31, 2024 | $ | 653,222 | $ | 255,485 | $ | 172,366 | $ | 1,081,073 |
We performed a quantitative assessment of all reporting units (Sterigenics, Nordion and Nelson Labs) as of October 1, 2024. The fair value of each reporting unit was calculated using a discounted cash flow analysis which was dependent on subjective market participant assumptions determined by management. Assumptions used in the analyses included discount rates, revenue growth rates and projected operating cash flows. Estimates of future cash flows are based upon relevant data at a point-in-time, are subject to change, and could vary from actual results. Cash flows are based on recent historical results and are consistent with the Company’s near-term financial forecasts and long-term strategic plans. The estimated fair value of Sterigenics, Nordion and Nelson Labs each exceeded its carrying amount (including goodwill) by an adequate margin to support a positive assertion that goodwill is not impaired as of October 1, 2024. No factors were identified that would result in the potential impairment to the indefinite-lived intangible assets. There have been no other significant events or circumstances that occurred since the annual assessment date of October 1 that would change the conclusions reached above. We provide additional information about our goodwill and other indefinite-lived intangible assets in Note 7, “Goodwill and Other Intangible Assets” to our consolidated financial statements.
Income Taxes. We use the liability method of accounting for income taxes whereby we recognize deferred tax assets and liabilities for the future tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Measurements of deferred taxes requires the use of judgment with respect to the realization of tax basis. We periodically review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income, expected timing of reversals of existing temporary timing differences and the implementation of tax planning strategies. Deferred tax assets will be reduced by a valuation allowance if, based on management’s estimate, it is more likely than not that a portion of the deferred tax assets will not be realized in a future period. The estimates used in the recognition of deferred tax assets are subject to revision in future periods based on new facts and circumstances. At December 31, 2024 and 2023, we maintained a valuation allowance of $160.6 million and $125.4 million, respectively, against our deferred tax assets, primarily attributable to the excess interest expense on our long-term debt in the United States, as well as state and foreign net operating loss carryforwards. If we are unable to generate sufficient future taxable income in certain tax jurisdictions, or if there is a material change in the effective income tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to increase our valuation allowance, which would increase our effective income tax rate and could result in an adverse impact on our consolidated financial position or results of operations. Changes in our judgment related to the measurement of deferred tax assets and liabilities could materially impact our results of operations.
We determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position meets the more likely-than-not recognition threshold, we presume that the position will be examined by the appropriate taxing authority and that the taxing authority will have full knowledge of all relevant information. A tax position that meets the more likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being
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realized upon ultimate settlement. Determining what constitutes an individual tax position and whether the more likely-than-not recognition threshold is met for a tax position are matters of judgment based on the individual facts and circumstances of that position evaluated in light of all available evidence. We review and adjust tax estimates periodically because of ongoing examinations by, and settlements with, the various taxing authorities, as well as changes in tax laws, regulations, and precedent. Changes in our judgment related to the assessment of uncertain tax positions could materially impact our results of operations.
We are subject to taxation from federal, state, local, and foreign jurisdictions. Tax positions are settled primarily through the completion of audits within each individual tax jurisdiction or the closing of a statute of limitation. Changes in applicable tax law or other events may also require us to revise past estimates. The United States Internal Revenue Service routinely conducts audits of our federal income tax returns. Additional information regarding income taxes is included in Note 10, “Income Taxes” to our consolidated financial statements.
Commitments and Contingencies. We are, and will likely continue to be, involved in a number of legal proceedings, government investigations and claims, which we believe generally arise in the course of our business, given our size, history, complexity and the nature of our business, products, customers, regulatory environment and industries in which we participate. These legal proceedings, investigations and claims generally involve a variety of legal theories and allegations, including, without limitation, personal injury (e.g., slip and falls, burns, vehicle accidents, mass tort), regulation (e.g., failure to meet specification or failure to comply with regulatory requirements), commercial claims (e.g., breach of contract, economic loss, misrepresentation), financial (e.g., taxes, reporting), employment (e.g., wrongful termination, discrimination, benefits matters) and other claims for damage and relief.
We record a liability for such contingencies to the extent we conclude that their occurrence is both probable and estimable. If a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability is disclosed within our consolidated financial statements, together with an estimate of the range of possible loss if the range is determinable and material. We consider many factors in making these assessments, including the professional judgment of experienced members of management and our legal counsel. For legal proceedings and claims described within our consolidated financial statements, we have made estimates as to the likelihood of unfavorable outcomes and the amounts of such potential losses, if a range is determinable. While it is not possible to determine the ultimate disposition of each of these matters, the ultimate resolution of pending regulatory and legal matters in future periods may have a material adverse effect on our financial condition, results of operations and/or liquidity. The Company may also incur material defense and settlement costs, diversion of management resources and other adverse effects on our business, financial condition, and/or results of operations. We record gain contingencies when realized and expected recoveries under applicable insurance contracts when we are assured of recovery. Refer to Note 19, “Commitments and Contingencies,” to our consolidated financial statements.
The Company reached agreements to settle approximately 880 pending and threatened EO claims in the State of Illinois on January 9, 2023. Under the binding Settlement Agreements, the Company paid $407.7 million to settle the claims.
On October 16, 2023, the Company reached an agreement to resolve 79 EO claims in the State of Georgia. Under the terms of the agreements, the Company paid $35.0 million to settle the claims.
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.