Sotera Health(SHC) - 2025 Q1 - Quarterly Report

Part I Financial Statements For the first quarter ended March 31, 2025, Sotera Health reported a net loss of $13.3 million, a significant downturn from the $6.3 million net income in the same period of 2024, primarily due to a $30.9 million charge for an EO litigation settlement in Illinois. Total assets increased slightly to $3.10 billion. Operating activities generated $55.5 million in cash, a substantial improvement from the prior year, mainly because of a large litigation payment made in Q1 2024 that did not recur Consolidated Balance Sheet Summary (in thousands) | Account | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Current Assets | $554,990 | $526,037 | | Total Assets | $3,097,528 | $3,071,648 | | Total Current Liabilities | $225,991 | $191,002 | | Total Liabilities | $2,683,437 | $2,666,737 | | Total Equity | $414,091 | $404,911 | Consolidated Statement of Operations Summary (in thousands) | Account | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Total Net Revenues | $254,523 | $248,176 | | Gross Profit | $135,432 | $127,115 | | Illinois EO litigation settlement | $30,943 | $0 | | (Loss) Income before income taxes | $(14,823) | $11,014 | | Net (Loss) Income | $(13,260) | $6,323 | | Diluted (Loss) Earnings Per Share | $(0.05) | $0.02 | Consolidated Statement of Cash Flows Summary (in thousands) | Activity | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $55,521 | $9,699 | | Net cash used in investing activities | $(19,881) | $(34,853) | | Net cash used in financing activities | $(8,087) | $(11,941) | | Net increase (decrease) in cash | $27,216 | $(38,834) | Notes to Consolidated Financial Statements The notes detail the company's accounting policies and provide further information on financial statement items. Key disclosures include revenue disaggregation by segment, details on the $2.22 billion in long-term debt, specifics of the $30.9 million Illinois EO litigation settlement, and segment performance. The company operates in three segments: Sterigenics, Nordion, and Nelson Labs - The company operates and reports in three segments: Sterigenics (sterilization services), Nordion (Co-60 supply), and Nelson Labs (lab testing and advisory)[27] Disaggregated Net Revenues by Segment (Q1 2025 vs Q1 2024, in thousands) | Segment | Q1 2025 Revenue | Q1 2024 Revenue | | :--- | :--- | :--- | | Sterigenics | $169,684 | $166,497 | | Nordion | $32,557 | $24,007 | | Nelson Labs | $52,282 | $57,672 | | Total | $254,523 | $248,176 | - As of March 31, 2025, total long-term debt amounted to a net amount of $2.22 billion, primarily consisting of a $1.47 billion term loan and $746 million in secured notes, both due in 2031[47] - On April 3, 2025, the company entered into a binding term sheet to settle 97 EO-related claims in Illinois for a total of $30.9 million. This amount was accrued as a liability and recognized as an expense in Q1 2025[106][108][173] Management's Discussion and Analysis (MD&A) Management reported a 2.6% increase in Q1 2025 net revenues to $254.5 million, driven by a 41.0% surge in product revenues from Nordion due to Co-60 harvest timing. This was partially offset by a 1.1% decline in service revenues. The company recorded a net loss of $13.3 million, compared to a $6.3 million net income in Q1 2024, primarily due to a $30.9 million litigation settlement. Adjusted EBITDA, a non-GAAP measure, rose 8.8% to $121.8 million. Cash flow from operations significantly increased to $55.5 million, reflecting the non-recurrence of a $35.0 million litigation payment made in the prior-year quarter Consolidated Results of Operations Total net revenues for Q1 2025 increased by 2.6% to $254.5 million year-over-year. Product revenues grew 41.0% due to favorable volume and mix at Nordion, while service revenues decreased 1.1%. A significant $30.9 million charge for the Illinois EO litigation settlement led to a net loss of $13.3 million, a stark contrast to the $6.3 million net income in Q1 2024. SG&A expenses rose 8.3%, driven by increased litigation fees Q1 2025 vs Q1 2024 Performance (in thousands) | Metric | Q1 2025 | Q1 2024 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Net Revenues | $254,523 | $248,176 | $6,347 | 2.6% | | Service Revenues | $223,940 | $226,481 | $(2,541) | (1.1)% | | Product Revenues | $30,583 | $21,695 | $8,888 | 41.0% | | Net (Loss) Income | $(13,260) | $6,323 | $(19,583) | (309.7)% | | Adjusted EBITDA | $121,839 | $111,944 | $9,895 | 8.8% | - The increase in product revenues was primarily attributable to the timing of the Co-60 harvest schedule at the Nordion segment[165] - SG&A expenses increased by $4.9 million (8.3%), mainly due to a $6.3 million rise in litigation and professional service fees related to EO sterilization facilities[171] Segment Results of Operations In Q1 2025, the Nordion segment was the standout performer with a 35.6% revenue increase to $32.6 million and a 61.5% surge in segment income, driven by favorable Co-60 harvest timing. Sterigenics saw modest revenue growth of 1.9% to $169.7 million due to pricing benefits. Nelson Labs experienced a 9.3% revenue decline to $52.3 million, as growth in core lab services was offset by a drop in expert advisory service revenue; however, its segment income still grew 7.0% due to lab optimization Segment Performance (Q1 2025 vs Q1 2024, in thousands) | Segment | Net Revenues Q1 2025 | % Change | Segment Income Q1 2025 | % Change | | :--- | :--- | :--- | :--- | :--- | | Sterigenics | $169,684 | 1.9% | $88,004 | 2.5% | | Nordion | $32,557 | 35.6% | $17,422 | 61.5% | | Nelson Labs | $52,282 | (9.3)% | $16,413 | 7.0% | - Nordion's strong performance was driven by volume and mix, largely attributable to a more favorable Co-60 harvest schedule[196][198][201] - Nelson Labs' revenue decreased due to a decline in expert advisory service revenue, but segment income margin improved from 26.6% to 31.4% due to lab optimization and favorable mix in core testing services[199][202] Liquidity and Capital Resources As of March 31, 2025, the company had $304.4 million in cash and cash equivalents. Operating activities generated $55.5 million in cash during Q1 2025, a significant increase from $9.7 million in Q1 2024, primarily because a $35.0 million Georgia EO litigation settlement was paid in the prior-year period. Capital expenditures were $19.9 million. Subsequent to the quarter end, on April 30, 2025, the company amended its Revolving Credit Facility, increasing its capacity to $600 million and extending the maturity to 2030 - Cash and cash equivalents stood at $304.4 million as of March 31, 2025[203] - Net cash from operating activities increased by $45.8 million year-over-year, mainly due to a $35.0 million payment for the Georgia EO litigation settlement in Q1 2024 that did not recur in Q1 2025[207] - On April 30, 2025, the company executed Amendment No. 5 to its Revolving Credit Facility, increasing total borrowing capacity to $600.0 million and extending the maturity date to April 30, 2030[211][51] Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no material changes to its market risks since the disclosures in its 2024 Form 10-K - Market risks have not materially changed for the three months ended March 31, 2025, from those described in the 2024 Form 10-K[219] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2025. There were no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that as of the end of the quarter, the company's disclosure controls and procedures are effective[220] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[221] Part II Legal Proceedings The company is involved in significant legal proceedings, primarily related to Ethylene Oxide (EO) tort litigation in California, Georgia, Illinois, and New Mexico. A key development is a $30.9 million settlement agreement for 97 claims in Illinois. The company is also facing securities litigation, which was dismissed but is now under appeal, and related derivative lawsuits. Insurance coverage for these matters is being actively pursued through litigation - The company faces numerous tort lawsuits alleging injuries from EO emissions at its facilities in California, Georgia, Illinois, and New Mexico[97][228] - A binding term sheet was entered on April 3, 2025, to resolve 97 Illinois EO claims for $30.9 million[106][108] - A stockholder class action lawsuit was dismissed with prejudice in March 2025, but the plaintiffs have appealed the decision[119] - The company is actively pursuing insurance coverage for EO tort lawsuits through multiple legal actions, with one case resulting in a favorable $110.2 million judgment for defense costs, which is currently under appeal[117] Risk Factors The company reports that there have been no material changes from the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2024 - There have been no material changes from the risk factors previously described in the 2024 Form 10-K[226] Other Information On April 30, 2025, the company amended its Revolving Credit Facility (Amendment No. 5), increasing the commitment by $176.2 million and extending the maturity date to April 30, 2030. Additionally, the company disclosed that no directors or officers adopted or terminated Rule 10b5-1 trading plans during the first quarter of 2025 - On April 30, 2025, the company entered into Amendment No. 5 to its Revolving Credit Facility, which increased commitments by $176.2 million and extended the maturity to April 30, 2030[227] - During Q1 2025, no directors or officers adopted or terminated any Rule 10b5-1 trading plans[230]