Sotera Health(SHC) - 2022 Q2 - Quarterly Report

Part I—FINANCIAL INFORMATION Financial Statements The unaudited consolidated financial statements for the six months ended June 30, 2022, show an 8.5% increase in total net revenues to $503.4 million, net income rising to $61.1 million, total assets at $2.84 billion, total liabilities at $2.20 billion, and operating cash flow decreasing to $108.3 million Balance Sheet Highlights | Metric | June 30, 2022 ($ thousands) | December 31, 2021 ($ thousands) | | :--- | :--- | :--- | | Total Assets | $2,839,685 | $2,789,502 | | Total Liabilities | $2,203,685 | $2,203,406 | | Total Equity | $636,000 | $586,096 | Consolidated Statements of Operations Highlights | Metric ($ thousands, except per share) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Net Revenues | $266,639 | $251,917 | $503,393 | $464,065 | | Operating Income | $71,495 | $78,272 | $124,987 | $124,636 | | Net Income | $30,418 | $42,615 | $61,059 | $53,680 | | Diluted EPS | $0.11 | $0.15 | $0.22 | $0.19 | Consolidated Statements of Cash Flows Highlights | Metric ($ thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $108,256 | $134,256 | | Net cash used in investing activities | $(71,192) | $(70,974) | | Net cash used in financing activities | $(1,083) | $(12,090) | Notes to Consolidated Financial Statements The notes detail accounting policies, revenue disaggregation, recent acquisitions, ongoing ethylene oxide (EO) litigation, and financial risk management, highlighting a $9.6 million impairment charge and three reportable segments - The company operates and reports in three segments: Sterigenics (sterilization services), Nordion (Co-60 supply), and Nelson Labs (lab testing and advisory)[29] - An impairment charge of approximately $9.6 million was recorded in Q2 2022, writing down the investment in the Auralux joint venture to its fair value of $0, as the project to construct an E-beam facility will not proceed[31] Segment Revenue Breakdown | Metric ($ thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Sterigenics Revenue | $307,254 | $276,333 | | Nordion Revenue | $84,480 | $75,043 | | Nelson Labs Revenue | $111,659 | $112,689 | | Total Net Revenues | $503,393 | $464,065 | - The company is subject to significant tort litigation related to ethylene oxide (EO) emissions from its facilities in Illinois (approx. 780 plaintiffs) and Georgia (approx. 300 plaintiffs), with the first Illinois trial expected to begin on August 12, 2022[106][108][110] Management's Discussion and Analysis (MD&A) Management discusses an 8.5% revenue increase for H1 2022, driven by Sterigenics and Nordion, offset by Nelson Labs' decline, with operating income flat due to inflation, supply chain issues, and increased litigation costs, while liquidity remains strong with increased capital expenditures Consolidated Results of Operations For Q2 2022, net revenues increased 5.8% to $266.6 million, while net income decreased 28.6% to $30.4 million due to an investment impairment and increased litigation expenses, with H1 2022 net revenues growing 8.5% to $503.4 million and net income increasing 13.7% to $61.1 million, despite rising SG&A expenses Q2 2022 Consolidated Performance | Metric ($ thousands) | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Net Revenues | $266,639 | $251,917 | 5.8% | | Operating Income | $71,495 | $78,272 | (8.7)% | | Net Income | $30,418 | $42,615 | (28.6)% | H1 2022 Consolidated Performance | Metric ($ thousands) | H1 2022 | H1 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Net Revenues | $503,393 | $464,065 | 8.5% | | Operating Income | $124,987 | $124,636 | 0.3% | | Net Income | $61,059 | $53,680 | 13.7% | - SG&A expenses for H1 2022 increased by $20.4 million (19.9%) year-over-year, primarily driven by an $11.7 million increase in litigation and professional services expense related to EO sterilization facilities[197][198] - A $9.6 million impairment charge was recorded in Q2 2022 related to the Auralux joint venture, which will not proceed with its planned facility construction[179] Segment Results of Operations For H1 2022, Sterigenics revenues increased 11.2% to $307.3 million and Nordion revenues grew 12.6% to $84.5 million, while Nelson Labs revenues decreased 0.9% to $111.7 million due to reduced pandemic-related testing, leading to a significant contraction in its segment income margin H1 2022 Net Revenues by Segment | Metric ($ thousands) | H1 2022 Net Revenues | H1 2021 Net Revenues | % Change | | :--- | :--- | :--- | :--- | | Sterigenics | $307,254 | $276,333 | 11.2% | | Nordion | $84,480 | $75,043 | 12.6% | | Nelson Labs | $111,659 | $112,689 | (0.9)% | H1 2022 Segment Income | Metric ($ thousands) | H1 2022 Segment Income | H1 2021 Segment Income | % Change | | :--- | :--- | :--- | :--- | | Sterigenics | $164,501 | $148,030 | 11.1% | | Nordion | $48,885 | $44,954 | 8.7% | | Nelson Labs | $38,098 | $46,896 | (18.8)% | - Nelson Labs' performance was negatively impacted by a 7.8% revenue decline from reduced demand for pandemic-related testing, supply chain pressures, and labor market constraints, leading to an 18.8% drop in segment income for H1 2022[230][233] Liquidity and Capital Resources As of June 30, 2022, the company had $140.6 million in cash and $277.4 million available under its Revolving Credit Facility, with operating cash flow decreasing by $26.0 million to $108.3 million due to higher tax and interest payments, while capital expenditures increased to $71.6 million - As of June 30, 2022, the company had $140.6 million in cash and cash equivalents and total availability of $277.4 million under its Revolving Credit Facility[235][248] - Capital expenditures for the six months ended June 30, 2022, increased to $71.6 million, up from $44.8 million in the same period of 2021, as part of the company's long-term strategy for facility and business expansion[236] - Cash flow from operations decreased by $26.0 million in H1 2022 compared to H1 2021, primarily due to a $14.6 million increase in cash paid for taxes and a $5.4 million increase in cash paid for interest[239] Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no material changes to the market risks previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021 - There were no material changes in market risks for the three and six months ended June 30, 2022, compared to those disclosed in the 2021 Form 10-K[254] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2022, with no material changes in internal control over financial reporting during the quarter - Management concluded that as of June 30, 2022, the company's disclosure controls and procedures are effective[255] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[256] Part II—OTHER INFORMATION Legal Proceedings The company is involved in significant legal proceedings, primarily related to ethylene oxide (EO) tort litigation in Illinois and Georgia, and ongoing criminal proceedings in Zoetermeer, Holland, concerning alleged environmental permit violations, with an escrow account available for potential claims - The report incorporates by reference the material legal proceedings detailed in Note 16, which include the Ethylene Oxide (EO) tort litigation in Illinois, Georgia, and New Mexico[260][265] - Criminal proceedings are ongoing in Holland against subsidiary DEROSS Holding B.V. for alleged environmental permit violations between 2004-2009, with potential fines estimated at €0.8 million for the company and €0.2 million for individuals, and an appeal by the Public Prosecutor against a favorable 2018 judgment is pending[262][264] - An escrow account with a balance of approximately $1.8 million and cash collateral of €2.4 million were in place as of June 30, 2022, to cover potential losses from the Zoetermeer, Holland matter[265] Risk Factors The company reports that there have been no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021 - There have been no material changes to the risk factors previously disclosed in the 2021 Form 10-K[267] Exhibits This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including CEO and CFO certifications and Inline XBRL data files - The report includes standard exhibits such as Sarbanes-Oxley Act certifications (Sections 302 and 906) and Inline XBRL filings[270]