UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-39729

SOTERA HEALTH COMPANY

(Exact name of registrant as specified in its charter)

Delaware

47-3531161

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

9100 South Hills Blvd, Suite 300

Broadview Heights, Ohio

44147

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code

(440)

262-1410

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	SHC	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

As of ~~July 27,~~October 25, 2022, there were ~~282,902,367~~282,113,499 shares of the registrant’s common stock, $0.01 par value per share, outstanding.

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SOTERA HEALTH COMPANY

- TABLE OF CONTENTS -

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements are often characterized by the use of the words such as “believes,” “estimates,” “expects,” “projects,” “may,” “intends,” “plans” or “anticipates,” or by discussions of strategy, plans or intentions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from historical results or any future results, performance or achievements expressed, suggested or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to:

•disruption in the availability of, or increases in the price of, ethylene oxide (“EO”), Cobalt-60 (“Co-60”) or our other direct materials, services and supplies, including as a result of current geopolitical instability arising from U.S., Canadian and European Union relations with Russia and related sanctions;

•adverse changes in industry trends;

•changes in environmental, health and safety regulations or preferences;

•health and safety risks associated with the use, storage, transportation and disposal of potentially hazardous materials such as EO and Co-60;

•liability claims relating to health risks associated with the use of EO;

•current and future legal proceedings;

•adverse judgments against two of our subsidiaries in the EO tort litigation that may require an appellate bond or alternative form of security to appeal, and plaintiff efforts to enforce judgments against us, any one of which may have an adverse impact on our liquidity;

•competition we face;

•market changes, including inflationary trends, that impact our long-term supply contracts with variable price clauses and increase our cost of revenues;

•allegations of our failure to properly perform services and potential product liability claims, recalls, penalties and reputational harm;

•compliance with the extensive regulatory requirements to which we are subject, the related costs, and any failures to receive or maintain, or delays in receiving, required clearance or approvals;

•business continuity hazards, including supply chain disruptions and other risks associated with our operations;

•the ongoing impact of the COVID-19 pandemic;

•our ability to increase capacity at existing facilities, build new facilities in a timely and cost-effective manner and renew leases for our leased facilities;

•our ability to attract and retain qualified employees;

•the risks of doing business internationally, including global and regional economic and political instability and compliance with numerous laws and regulations in multiple jurisdictions;

•cyber security breaches, unauthorized data disclosures, and our dependence on information technology systems;

•any inability to pursue strategic transactions, including our ability to find suitable acquisition targets, or our failure to integrate strategic acquisitions successfully into our business;

•our ability to maintain effective internal controls over financial reporting;

•our reliance on intellectual property to maintain our competitive position and the risk of claims from third parties that we infringe or misappropriate their intellectual property rights;

•our ability to comply with rapidly evolving data privacy and security laws and regulations and any ineffective compliance efforts with such laws and regulations;

•the effects of unionization efforts and labor regulations in certain countries in which we operate;

•our ability to maintain profitability in the future;

•impairment charges on our goodwill and other intangible assets with indefinite lives, as well as other long-lived assets and intangible assets with definite lives;

•adverse changes to our tax positions in U.S. or non-U.S. jurisdictions, the interpretation and application of recent U.S. tax legislation or other changes in U.S. or non-U.S. taxation of our operations;

•our significant leverage could adversely affect our ability to raise additional capital, limit our ability to react to changes in the economy or our industry, limit our flexibility in operating our business through restrictions contained in our debt agreements and prevent us from meeting our obligations under our existing and future indebtedness; and

•uncertainty around discontinuation of LIBOR and transition to certain other interest “benchmarks.”

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These statements are based on current plans, estimates and projections, and therefore you should not place undue reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them publicly in light of new information or future events, except as required by law. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved.

~~Table of Contents~~

You should carefully consider the above factors, as well as the factors discussed elsewhere in this Quarterly Report on Form 10-Q, including under Part II, Item 1A, “Risk Factors,” as well as Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 10-K”). If any of these trends, risks or uncertainties actually occurs or continues, our business, financial condition or operating results could be materially adversely affected, the trading prices of our securities could decline and you could lose all or part of your investment. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

Unless expressly indicated or the context requires otherwise, the terms “Sotera Health,” “Company,” “we,” “us,” and “our” in this document refer to Sotera Health Company, a Delaware corporation, and, where appropriate, its subsidiaries on a consolidated basis.

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Part I—FINANCIAL INFORMATION

Item 1. Financial Statements

Sotera Health Company

Consolidated Balance Sheets

(in thousands)

As of
June 30, 2022 December 31, 2021
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 139,564 $ 106,917
Restricted cash short-term 1,054 7
Accounts receivable, net of allowance for uncollectible accounts of $1,816 and $1,287, respectively 119,852 108,183
Inventories, net 39,652 54,288
Prepaid expenses and other current assets 81,173 71,923
Income taxes receivable 17,386 4,643
Total current assets 398,681 345,961
Property, plant, and equipment, net 699,571 650,797
Operating lease assets 29,853 39,946
Deferred income taxes 5,425 5,885
Investment in unconsolidated affiliate — 9,405
Post-retirement assets 8,788 5,478
Other assets 38,308 12,866
Other intangible assets, net 543,057 598,844
Goodwill 1,116,002 1,120,320
Total assets $ 2,839,685 $ 2,789,502
Liabilities and equity
Current liabilities:
Accounts payable $ 65,271 $ 72,868
Accrued liabilities 52,658 61,861
Deferred revenues 6,863 8,669
Current portion of finance lease obligations 1,615 1,160
Current portion of operating lease obligations 8,132 9,289
Current portion of asset retirement obligations 606 619
Income taxes payable 6,876 6,695
Total current liabilities 142,021 161,161
Long-term debt 1,745,548 1,743,534
Finance lease obligations, less current portion 57,140 40,877
Operating lease obligations, less current portion 24,546 33,017
Noncurrent asset retirement obligations 42,688 41,833
Deferred lease income 20,146 20,745
Post-retirement obligations 11,198 11,464
Noncurrent liabilities 15,668 16,274
Deferred income taxes 144,730 134,501
Total liabilities 2,203,685 2,203,406
See Commitments and contingencies note 0 0
Equity:
Common stock, with $0.01 par value, 1,200,000 shares authorized; 286,037 shares issued at June 30, 2022 and December 31, 2021, respectively. 2,860 2,860
Preferred stock, with $0.01 par value, 120,000 authorized; no shares issued at June 30, 2022 and
December 31, 2021, respectively
— —
Treasury stock, at cost (3,135 and 3,052 shares at June 30, 2022 and December 31, 2021, respectively) (32,654) (33,545)
Additional paid-in capital 1,181,995 1,172,593
Retained deficit (411,187) (472,246)
Accumulated other comprehensive loss (105,014) (83,566)
Total equity attributable to Sotera Health Company 636,000 586,096
Noncontrolling interests — —
Total equity 636,000 586,096
Total liabilities and equity $ 2,839,685 $ 2,789,502


	As of
	September 30, 2022		December 31, 2021
Assets	(Unaudited)
Current assets:
Cash and cash equivalents	$	163,975	$	106,917
Restricted cash short-term	986		7
Accounts receivable, net of allowance for uncollectible accounts of $1,414 and $1,287, respectively	111,613		108,183
Inventories, net	37,153		54,288
Prepaid expenses and other current assets	81,673		71,923
Income taxes receivable	25,334		4,643
Total current assets	420,734		345,961
Property, plant, and equipment, net	704,406		650,797
Operating lease assets	27,194		39,946
Deferred income taxes	5,087		5,885
Investment in unconsolidated affiliate	—		9,405
Post-retirement assets	9,856		5,478
Other assets	47,131		12,866
Other intangible assets, net	503,755		598,844
Goodwill	1,092,469		1,120,320
Total assets	$	2,810,632	$	2,789,502
Liabilities and equity
Current liabilities:
Accounts payable	$	60,730	$	72,868
Accrued liabilities	56,762		61,861
Deferred revenue	5,347		8,669

Current portion of finance lease obligations	1,591		1,160
Current portion of operating lease obligations	7,718		9,289
Current portion of asset retirement obligations	532		619
Income taxes payable	7,351		6,695
Total current liabilities	140,031		161,161
Long-term debt	1,746,555		1,743,534
Finance lease obligations, less current portion	54,935		40,877
Operating lease obligations, less current portion	22,174		33,017
Noncurrent asset retirement obligations	43,889		41,833
Deferred lease income	18,769		20,745
Post-retirement obligations	10,485		11,464
Noncurrent liabilities	15,345		16,274
Deferred income taxes	151,720		134,501
Total liabilities	2,203,903		2,203,406
See Commitments and contingencies note
Equity:
Common stock, with $0.01 par value, 1,200,000 shares authorized; 286,037 shares issued at September 30, 2022 and December 31, 2021, respectively	2,860		2,860
Preferred stock, with $0.01 par value, 120,000 authorized no shares issued at September 30, 2022 and December 31, 2021, respectively	—		—
Treasury stock, at cost (3,924 and 3,052 shares at September 30, 2022 and December 31, 2021, respectively)	(32,653)		(33,545)
Additional paid-in capital	1,186,620		1,172,593
Retained deficit	(386,097)		(472,246)
Accumulated other comprehensive loss	(164,001)		(83,566)
Total equity attributable to Sotera Health Company	606,729		586,096
Noncontrolling interests	—		—
Total equity	606,729		586,096
Total liabilities and equity	$	2,810,632	$	2,789,502

See notes to consolidated financial statements.

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Sotera Health Company

Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except per share amounts)

(Unaudited)


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021

Revenues:	Revenues:									Revenues:
Service	Service	$	221,529	$	208,710	$	427,747	$	397,408	Service	$	216,704	$	200,499	$	644,451	$	597,907
Product	Product	45,110		43,207		75,646		66,657		Product	32,000		25,665		107,646		92,322
Total net revenues	Total net revenues	266,639		251,917		503,393		464,065		Total net revenues	248,704		226,164		752,097		690,229
Cost of revenues:	Cost of revenues:									Cost of revenues:
Service	Service	98,407		91,391		192,983		176,427		Service	99,772		88,349		292,755		264,776
Product	Product	17,836		16,765		31,139		28,505		Product	12,919		12,229		44,058		40,734
Total cost of revenues	Total cost of revenues	116,243		108,156		224,122		204,932		Total cost of revenues	112,691		100,578		336,813		305,510
Gross profit	Gross profit	150,396		143,761		279,271		259,133		Gross profit	136,013		125,586		415,284		384,719
Operating expenses:	Operating expenses:									Operating expenses:
Selling, general and administrative expenses	Selling, general and administrative expenses	63,132		49,828		122,674		102,293		Selling, general and administrative expenses	57,091		44,038		179,765		146,331
Amortization of intangible assets	Amortization of intangible assets	15,769		15,661		31,610		32,204		Amortization of intangible assets	15,727		15,877		47,337		48,081

Total operating expenses	Total operating expenses	78,901		65,489		154,284		134,497		Total operating expenses	72,818		59,915		227,102		194,412
Operating income	Operating income	71,495		78,272		124,987		124,636		Operating income	63,195		65,671		188,182		190,307
Interest expense, net	Interest expense, net	14,044		19,163		24,448		40,445		Interest expense, net	23,427		18,140		47,875		58,585
Impairment of investment in unconsolidated affiliate	Impairment of investment in unconsolidated affiliate	9,613		—		9,613		—		Impairment of investment in unconsolidated affiliate	—		—		9,613		—
Loss on extinguishment of debt	Loss on extinguishment of debt	—		—		—		14,312		Loss on extinguishment of debt	—		6,365		—		20,677
Foreign exchange (gain) loss	Foreign exchange (gain) loss	(755)		76		33		654		Foreign exchange (gain) loss	(535)		756		(502)		1,410
Other expense (income), net		485		(2,764)		(2,482)		(6,654)
Other income, net										Other income, net	(1,713)		(693)		(4,195)		(7,347)
Income before income taxes	Income before income taxes	48,108		61,797		93,375		75,879		Income before income taxes	42,016		41,103		135,391		116,982
Provision for income taxes	Provision for income taxes	17,690		19,182		32,316		22,199		Provision for income taxes	16,926		13,659		49,242		35,858
Net income	Net income	30,418		42,615		61,059		53,680		Net income	25,090		27,444		86,149		81,124
Less: Net income attributable to noncontrolling interests	Less: Net income attributable to noncontrolling interests	—		16		—		239		Less: Net income attributable to noncontrolling interests	—		—		—		239
Net income attributable to Sotera Health Company	Net income attributable to Sotera Health Company	30,418		42,599		61,059		53,441		Net income attributable to Sotera Health Company	25,090		27,444		86,149		80,885
Other comprehensive income (loss) net of tax:	Other comprehensive income (loss) net of tax:									Other comprehensive income (loss) net of tax:
Pension and post-retirement benefits (net of taxes of $179, $(142), $87, and $(226), respectively)		532		(421)		258		(670)
Interest rate derivatives (net of taxes of $1,241, $0, $3,350 and $0, respectively)		3,178		—		9,357		—
Pension and post-retirement benefits (net of taxes of $357, $466, $444, and $240, respectively)										Pension and post-retirement benefits (net of taxes of $357, $466, $444, and $240, respectively)	1,065		1,383		1,323		713
Interest rate derivatives (net of taxes of $3,368, $—, $6,718 and $—, respectively)										Interest rate derivatives (net of taxes of $3,368, $—, $6,718 and $—, respectively)	9,408		—		18,765		—
Foreign currency translation	Foreign currency translation	(46,038)		20,425		(31,063)		17,339		Foreign currency translation	(69,460)		(29,867)		(100,523)		(12,528)
Comprehensive income (loss)	Comprehensive income (loss)	(11,910)		62,619		39,611		70,349		Comprehensive income (loss)	(33,897)		(1,040)		5,714		69,309
Less: comprehensive income attributable to noncontrolling interests	Less: comprehensive income attributable to noncontrolling interests	—		326		—		534		Less: comprehensive income attributable to noncontrolling interests	—		—		—		534
Comprehensive income (loss) attributable to Sotera Health Company	Comprehensive income (loss) attributable to Sotera Health Company	$	(11,910)	$	62,293	$	39,611	$	69,815	Comprehensive income (loss) attributable to Sotera Health Company	$	(33,897)	$	(1,040)	$	5,714	$	68,775
Earnings per share:	Earnings per share:									Earnings per share:
Basic	Basic	$	0.11	$	0.15	$	0.22	$	0.19	Basic	$	0.09	$	0.10	$	0.31	$	0.29
Diluted	Diluted	0.11		0.15		0.22		0.19		Diluted	0.09		0.10		0.31		0.29
Weighted average number of shares outstanding:	Weighted average number of shares outstanding:									Weighted average number of shares outstanding:
Basic	Basic	279,990		279,078		279,910		278,953		Basic	280,142		279,381		279,988		279,097
Diluted	Diluted	280,171		279,214		280,038		279,078		Diluted	280,172		279,560		280,093		279,253

See notes to consolidated financial statements.

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Sotera Health Company

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)


		Six Months Ended June 30,					Nine Months Ended September 30,
		2022		2021			2022		2021
Operating activities:	Operating activities:					Operating activities:
Net income	Net income	$	61,059	$	53,680	Net income	$	86,149	$	81,124
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	Depreciation	31,611		31,062		Depreciation	47,496		47,457
Amortization of intangible assets	Amortization of intangible assets	41,378		44,060		Amortization of intangible assets	61,596		65,299
Impairment of investment in unconsolidated affiliate	Impairment of investment in unconsolidated affiliate	9,613		—		Impairment of investment in unconsolidated affiliate	9,613		—
Loss on extinguishment of debt	Loss on extinguishment of debt	—		14,312		Loss on extinguishment of debt	—		20,677
Deferred income taxes	Deferred income taxes	10,416		3,504		Deferred income taxes	17,153		8,131
Share-based compensation expense	Share-based compensation expense	10,339		6,942		Share-based compensation expense	14,955		10,489
Accretion of asset retirement obligations	Accretion of asset retirement obligations	1,118		1,153		Accretion of asset retirement obligations	1,645		1,751
Unrealized foreign exchange losses		1,274		1,097
Unrealized gains on derivatives not designated as hedging instruments		(8,029)		(1,614)
Unrealized foreign exchange (gain) loss						Unrealized foreign exchange (gain) loss	(5,610)		715
Unrealized gain on derivatives not designated as hedging instruments						Unrealized gain on derivatives not designated as hedging instruments	(4,323)		(424)
Amortization of debt issuance costs	Amortization of debt issuance costs	2,836		3,245		Amortization of debt issuance costs	4,259		4,789
Other	Other	(4,043)		(4,241)		Other	(6,109)		(6,174)
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Accounts receivable	Accounts receivable	(13,921)		(25,754)		Accounts receivable	(8,558)		(4,901)
Inventories	Inventories	14,012		(770)		Inventories	13,896		(3,429)
Other current assets	Other current assets	(6,683)		983		Other current assets	(13,066)		2,225
Accounts payable	Accounts payable	(9,993)		15,080		Accounts payable	(13,367)		(291)
Accrued liabilities	Accrued liabilities	(11,869)		(4,375)		Accrued liabilities	(1,874)		(7,985)
Income taxes payable / receivable		(15,968)		(3,998)
Income taxes payable / receivable, net						Income taxes payable / receivable, net	(25,050)		(3,620)
Other liabilities	Other liabilities	(468)		(95)		Other liabilities	1,489		(290)
Other long-term assets	Other long-term assets	(4,426)		(15)		Other long-term assets	(4,259)		(349)
Net cash provided by operating activities	Net cash provided by operating activities	108,256		134,256		Net cash provided by operating activities	176,035		215,194
Investing activities:	Investing activities:					Investing activities:
Purchases of property, plant and equipment	Purchases of property, plant and equipment	(71,642)		(44,789)		Purchases of property, plant and equipment	(110,642)		(60,898)
Purchase of mandatorily redeemable noncontrolling interest in Nelson Laboratories Fairfield, Inc.	Purchase of mandatorily redeemable noncontrolling interest in Nelson Laboratories Fairfield, Inc.	—		(12,425)		Purchase of mandatorily redeemable noncontrolling interest in Nelson Laboratories Fairfield, Inc.	—		(12,425)
Purchase of BioScience Laboratories, LLC, net of cash acquired	Purchase of BioScience Laboratories, LLC, net of cash acquired	—		(13,760)		Purchase of BioScience Laboratories, LLC, net of cash acquired	—		(13,530)
Adjustment to purchase of Regulatory Compliance Associates Inc.	Adjustment to purchase of Regulatory Compliance Associates Inc.	450		—		Adjustment to purchase of Regulatory Compliance Associates Inc.	450		—
Other investing activities						Other investing activities	34		(717)
Net cash used in investing activities	Net cash used in investing activities	(71,192)		(70,974)		Net cash used in investing activities	(110,158)		(87,570)
Financing activities:	Financing activities:					Financing activities:
Purchase of noncontrolling interests in China subsidiaries	Purchase of noncontrolling interests in China subsidiaries	—		(7,720)		Purchase of noncontrolling interests in China subsidiaries	—		(8,418)
Payments of debt issuance costs		(27)		(3,661)
Payments of debt issuance costs and prepayment premium						Payments of debt issuance costs and prepayment premium	(31)		(6,718)
Payments on debt						Payments on debt	—		(100,000)
Other financing activities	Other financing activities	(1,056)		(709)		Other financing activities	(1,452)		(368)
Net cash used in financing activities	Net cash used in financing activities	(1,083)		(12,090)		Net cash used in financing activities	(1,483)		(115,504)
Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	(2,287)		2,578		Effect of exchange rate changes on cash and cash equivalents	(6,357)		345
Net increase in cash and cash equivalents, including restricted cash	Net increase in cash and cash equivalents, including restricted cash	33,694		53,770		Net increase in cash and cash equivalents, including restricted cash	58,037		12,465
Cash and cash equivalents, including restricted cash, at beginning of period	Cash and cash equivalents, including restricted cash, at beginning of period	106,924		102,454		Cash and cash equivalents, including restricted cash, at beginning of period	106,924		102,454
Cash and cash equivalents, including restricted cash, at end of period	Cash and cash equivalents, including restricted cash, at end of period	$	140,618	$	156,224	Cash and cash equivalents, including restricted cash, at end of period	$	164,961	$	114,919
Supplemental disclosures of cash flow information:	Supplemental disclosures of cash flow information:					Supplemental disclosures of cash flow information:
Cash paid during the period for interest	Cash paid during the period for interest	$	42,057	$	36,615	Cash paid during the period for interest	$	65,045	$	53,726
Cash paid during the period for income taxes, net of tax refunds received	Cash paid during the period for income taxes, net of tax refunds received	37,340		22,785		Cash paid during the period for income taxes, net of tax refunds received	56,474		31,922
Purchases of property, plant and equipment included in accounts payable	Purchases of property, plant and equipment included in accounts payable	17,923		9,670		Purchases of property, plant and equipment included in accounts payable	18,583		14,527

See notes to consolidated financial statements.

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Sotera Health Company

Consolidated Statements of Equity

(in thousands)

(Unaudited)


		Three Months Ended June 30, 2022																						Three Months Ended September 30, 2022
		Common Stock					Additional Paid-In Capital				Retained Earnings / (Accumulated Deficit)		Accumulated Other Comprehensive (Loss) Income			Noncontrolling Interests				Total Equity				Common Stock							Additional Paid-In Capital				Retained Earnings / (Accumulated Deficit)				Accumulated Other Comprehensive (Loss) Income				Noncontrolling Interests				Total Equity
		Shares	Amount		Treasury Stock										Shares								Amount			Treasury Stock
Balance at March 31, 2022		282,930	$	2,860	$	(33,536)			$	1,177,097			$	(441,605)				$	(62,686)			$	—		$	642,130
Balance at June 30, 2022																							Balance at June 30, 2022	282,902			$	2,860	$	(32,654)			$	1,181,995			$	(411,187)			$	(105,014)			$	—			$	636,000

Share-based compensation plans	Share-based compensation plans	(28)	—		882		4,898				—		—			—				5,780			Share-based compensation plans	(789)			—		1		4,625				—				—				—				4,626
Comprehensive income (loss):	Comprehensive income (loss):																						Comprehensive income (loss):
Pension and post-retirement plan adjustments, net of tax	Pension and post-retirement plan adjustments, net of tax	—	—		—		—				—		532			—				532			Pension and post-retirement plan adjustments, net of tax	—			—		—		—				—				1,065				—				1,065
Foreign currency translation	Foreign currency translation	—	—		—		—				—		(46,038)			—				(46,038)			Foreign currency translation	—			—		—		—				—				(69,460)				—				(69,460)
Interest rate derivatives, net of tax	Interest rate derivatives, net of tax	—	—		—		—				—		3,178			—				3,178			Interest rate derivatives, net of tax	—			—		—		—				—				9,408				—				9,408
Net income	Net income	—	—		—		—				30,418		—			—				30,418			Net income	—			—		—		—				25,090				—				—				25,090
Balance at June 30, 2022		282,902	$	2,860	$	(32,654)	$	1,181,995			$	(411,187)	$	(105,014)		$	—			$	636,000
Balance at September 30, 2022																							Balance at September 30, 2022	282,113			$	2,860	$	(32,653)	$	1,186,620			$	(386,097)			$	(164,001)			$	—			$	606,729


		Six Months Ended June 30, 2022																				Nine Months Ended September 30, 2022
		Common Stock					Additional Paid-In Capital		Retained Earnings / (Accumulated Deficit)		Accumulated Other Comprehensive (Loss) Income			Noncontrolling Interests				Total Equity				Common Stock										Additional Paid-In Capital					Retained Earnings / (Accumulated Deficit)					Accumulated Other Comprehensive (Loss) Income					Noncontrolling Interests					Total Equity
		Shares	Amount		Treasury Stock								Shares								Amount			Treasury Stock
Balance at December 31, 2021	Balance at December 31, 2021	282,985	$	2,860	$	(33,545)			$	1,172,593	$	(472,246)				$	(83,566)			$	—		$	586,096	Balance at December 31, 2021		282,985			$	2,860				$	(33,545)				$	1,172,593				$	(472,246)				$	(83,566)				$	—	$	586,096
Share-based compensation plans	Share-based compensation plans	(83)	—		891		9,402		—		—			—				10,293			Share-based compensation plans	(872)			—			892						14,027					—					—					—					14,919
Comprehensive income (loss):	Comprehensive income (loss):																				Comprehensive income (loss):
Pension and post-retirement plan adjustments, net of tax	Pension and post-retirement plan adjustments, net of tax	—	—		—		—		—		258			—				258			Pension and post-retirement plan adjustments, net of tax	—			—			—				—					—					1,323					—					1,323
Foreign currency translation	Foreign currency translation	—	—		—		—		—		(31,063)			—				(31,063)			Foreign currency translation	—			—			—				—					—					(100,523)					—					(100,523)
Interest rate derivatives, net of tax	Interest rate derivatives, net of tax	—	—		—		—		—		9,357			—				9,357			Interest rate derivatives, net of tax	—			—			—				—					—					18,765					—					18,765
Net income	Net income	—	—		—		—		61,059		—			—				61,059			Net income	—			—			—				—					86,149					—					—					86,149
Balance at June 30, 2022		282,902	$	2,860	$	(32,654)	$	1,181,995	$	(411,187)	$	(105,014)		$	—			$	636,000
Balance at September 30, 2022																					Balance at September 30, 2022	282,113			$	2,860		$	(32,653)			$	1,186,620				$	(386,097)				$	(164,001)				$	—				$	606,729

See notes to consolidated financial statements.

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Sotera Health Company

Consolidated Statements of Equity (continued)

(in thousands)

(Unaudited)


		Three Months Ended June 30, 2021																				Three Months Ended September 30, 2021
		Common Stock					Additional Paid-In Capital		Retained Earnings / (Accumulated Deficit)		Accumulated Other Comprehensive (Loss) Income			Noncontrolling Interests				Total Equity				Common Stock					Additional Paid-In Capital				Retained Earnings / (Accumulated Deficit)				Accumulated Other Comprehensive (Loss) Income				Noncontrolling Interests				Total Equity
		Shares	Amount		Treasury Stock								Shares								Amount
Balance at March 31, 2021		282,900	$	2,860	$	(34,000)			$	1,169,852	$	(578,286)				$	(97,162)			$	2,480		$	465,744
Acquisition of noncontrolling interests		—	—		—		(5,772)		—		—			(2,806)				(8,578)
Issuance of shares		47	—		—		1,080		—		—			—				1,080
Balance at June 30, 2021																					Balance at June 30, 2021	282,917			$	2,860			$	1,167,566			$	(535,687)			$	(77,468)			$	—			$	523,271
Share-based compensation plans	Share-based compensation plans	(30)	—		—		2,406		—		—			—				2,406			Share-based compensation plans	—			—		3,538				—				—				—				3,538
Comprehensive income (loss):	Comprehensive income (loss):																				Comprehensive income (loss):
Pension and post-retirement plan adjustments, net of tax	Pension and post-retirement plan adjustments, net of tax	—	—		—		—		—		(421)			—				(421)			Pension and post-retirement plan adjustments, net of tax	—			—		—				—				1,383				—				1,383
Foreign currency translation	Foreign currency translation	—	—		—		—		—		20,115			310				20,425			Foreign currency translation	—			—		—				—				(29,867)				—				(29,867)

Interest rate derivatives, net of tax																					Interest rate derivatives, net of tax	—			—		—				—				—				—				—
Net income	Net income	—	—		—		—		42,599		—			16				42,615			Net income	—			—		—				27,444				—				—				27,444
Balance at June 30, 2021		282,917	$	2,860	$	(34,000)	$	1,167,566	$	(535,687)	$	(77,468)		$	—			$	523,271
Balance at September 30, 2021																					Balance at September 30, 2021	282,917			$	2,860	$	1,171,104			$	(508,243)			$	(105,952)			$	—			$	525,769


		Six Months Ended June 30, 2021																				Nine Months Ended September 30, 2021
		Common Stock					Additional Paid-In Capital		Retained Earnings / (Accumulated Deficit)		Accumulated Other Comprehensive (Loss) Income			Noncontrolling Interests				Total Equity				Common Stock								Additional Paid-In Capital			Retained Earnings / (Accumulated Deficit)				Accumulated Other Comprehensive (Loss) Income				Noncontrolling Interests				Total Equity
		Shares	Amount		Treasury Stock								Shares								Amount
Balance at December 31, 2020	Balance at December 31, 2020	283,248	$	2,860	$	(34,000)			$	1,166,412	$	(589,128)				$	(93,842)			$	2,272		$	454,574	Balance at December 31, 2020		283,248	$	2,860						$	1,166,412			$	(589,128)			$	(93,842)			$	2,272	$	454,574
Acquisition of noncontrolling interests	Acquisition of noncontrolling interests	—	—		—		(5,772)		—		—			(2,806)				(8,578)			Acquisition of noncontrolling interests	—			—							(5,772)				—				—				(2,806)				(8,578)
Issuance of shares	Issuance of shares	47	—		—		1,080		—		—			—				1,080			Issuance of shares	47			—					1,080			—				—				—				1,080
Share-based compensation plans	Share-based compensation plans	(378)	—		—		5,846		—		—			—				5,846			Share-based compensation plans	(378)			—					9,384			—				—				—				9,384
Comprehensive income (loss):	Comprehensive income (loss):																				Comprehensive income (loss):
Pension and post-retirement plan adjustments, net of tax	Pension and post-retirement plan adjustments, net of tax	—	—		—		—		—		(670)			—				(670)			Pension and post-retirement plan adjustments, net of tax	—			—					—			—				713				—				713
Foreign currency translation	Foreign currency translation	—	—		—		—		—		17,044			295				17,339			Foreign currency translation	—			—					—			—				(12,823)				295				(12,528)

Interest rate derivatives, net of tax																					Interest rate derivatives, net of tax	—			—					—			—				—				—				—
Net income	Net income	—	—		—		—		53,441		—			239				53,680			Net income	—			—					—			80,885				—				239				81,124
Balance at June 30, 2021		282,917	$	2,860	$	(34,000)	$	1,167,566	$	(535,687)	$	(77,468)		$	—			$	523,271
Balance at September 30, 2021																					Balance at September 30, 2021	282,917			$	2,860				$	1,171,104		$	(508,243)			$	(105,952)			$	—			$	525,769

See notes to consolidated financial statements.

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Sotera Health Company

Notes to Consolidated Financial Statements

1.Basis of Presentation

Principles of Consolidation – Sotera Health Company (also referred to herein as the “Company,” “we,” “our,” “us” or “its”), is a leading global provider of mission-critical end-to-end sterilization solutions, lab testing and advisory services for the healthcare industry with operations primarily in the Americas, Europe and Asia.

We operate and report in 3three segments, Sterigenics, Nordion and Nelson Labs. We describe our reportable segments in Note 18, “Segment Information”. All significant intercompany balances and transactions have been eliminated in consolidation.

Noncontrolling interests ~~represented~~represent the noncontrolling stockholders’ proportionate share of the total equity in the Company’s consolidated subsidiaries. In the second quarter of 2021, we purchased the outstanding noncontrolling interests of 15% and 33% of our 2two China subsidiaries. Refer to Note 4, “Acquisitions” for additional details. Prior to our acquisition of the noncontrolling interests in our 2two subsidiaries in China, we consolidated the results of operations of these subsidiaries with our results of operations and reflected the noncontrolling interest on our Consolidated Statements of Operations and Comprehensive Income (Loss) as “Net income attributable to noncontrolling interests.”

On March 11, 2021, we purchased the 15% noncontrolling interest that remained from the August 2018 acquisition of Nelson Laboratories Fairfield, Inc. (“Nelson Labs Fairfield”). As the purchase of this noncontrolling interest was mandatorily redeemable, no earnings were allocated to this noncontrolling interest. See Note 4, “Acquisitions” for additional details.

In July 2020, we acquired a 60% equity ownership interest in Auralux Enterprises, ~~Ltd.~~Ltd (“Auralux”), a joint venture to construct an E-beam facility in Alberta, Canada in connection with our acquisition of Iotron Industries Canada, Inc. (“Iotron”). We have determined this to be an investment in a variable interest entity (“VIE”). The investment ~~was~~is not consolidated as the Company concluded that we are not the primary beneficiary of the VIE. ~~The Company accounts~~This investment is accounted for ~~the joint venture~~ using the equity method. The investment is reflected within “Investment in unconsolidated affiliates” on the Consolidated Balance Sheets.

During the three months ended June 30, 2022, we identified certain events and circumstances that indicated a decline in value of our investment in ~~Auralux~~this joint venture that was other-than-temporary. Consequently, as of June 30, 2022, we wrote down the investment in ~~Auralux~~the joint venture to its fair value of $0, resulting in an impairment charge of approximately $9.6 million.

Use of Estimates – In preparing our consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”), we make estimates and assumptions that affect the amounts reported and the accompanying notes. We regularly evaluate the estimates and assumptions used and revise them as new information becomes available. Actual results may vary from those estimates.

Interim Financial Statements – The accompanying consolidated financial statements include the assets, liabilities, operating results, and cash flows of the Company and its wholly owned subsidiaries. These financial statements are prepared in accordance with U.S. GAAP for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These unaudited interim financial statements should be read in conjunction with the Company's annual consolidated financial statements and accompanying notes on Form 10-K for the year ended December 31, 2021.

2.Recent Accounting Standards

Adoption of Accounting Standard Updates

Effective January 1, 2022, we adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”): Measurement of Credit Losses on Financial Instruments, and the subsequently issued additional guidance that modified ASU 2016-13 which was originally issued by the Financial Accounting Standards Board (“FASB”) in June 2016. The standard requires an entity to change its accounting approach in determining impairment of certain financial instruments, including trade receivables, from an “incurred loss” to a “current expected credit loss” model. The adoption of this standard did not have a material impact on our consolidated financial statements and disclosures.

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Sotera Health Company

Notes to Consolidated Financial Statements

Effective January 1, 2022, we adopted ASU 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes which was issued by the FASB in December 2019. The standard simplifies the accounting for income taxes and makes a number of changes meant to add or clarify guidance on accounting for income taxes. The adoption of this standard did not have a material impact on our consolidated financial statements and disclosures.

ASUs Issued But Not Yet Adopted

In October 2021, the FASB issued ASU 2021-08 - Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). The amendments in ASU 2021-08 require that an acquiring entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contract with Customers (“ASC Topic 606”). At the acquisition date, an acquirer should account for the related revenue contracts in accordance with ASC Topic 606 as if it had originated the contracts. For public business entities, these amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are currently assessing the effect that ASU 2021-08 will have on our financial position, results of operations, and disclosures.

3.Revenue Recognition

The following table shows disaggregated net revenues from contracts with external customers by timing of revenue and by segment for the three and ~~six~~nine months ended ~~June~~September 30, 2022 and 2021:


(thousands of U.S. dollars)	(thousands of U.S. dollars)	Three Months Ended June 30, 2022								(thousands of U.S. dollars)	Three Months Ended September 30, 2022
		Sterigenics		Nordion		Nelson Labs		Consolidated			Sterigenics		Nordion		Nelson Labs		Consolidated
Point in time	Point in time	$	157,792	$	46,386	$	—	$	204,178	Point in time	$	157,723	$	33,830	$	—	$	191,553
Over time	Over time	—		4,092		58,369		62,461		Over time	—		1,241		55,910		57,151
Total	Total	$	157,792	$	50,478	$	58,369	$	266,639	Total	$	157,723	$	35,071	$	55,910	$	248,704


(thousands of U.S. dollars)	(thousands of U.S. dollars)	Three Months Ended June 30, 2021								(thousands of U.S. dollars)	Three Months Ended September 30, 2021
		Sterigenics		Nordion		Nelson Labs		Consolidated			Sterigenics		Nordion		Nelson Labs		Consolidated
Point in time	Point in time	$	145,182	$	47,753	$	—	$	192,935	Point in time	$	145,314	$	28,768	$	—	$	174,082
Over time	Over time	—		1,372		57,610		58,982		Over time	—		—		52,082		52,082
Total	Total	$	145,182	$	49,125	$	57,610	$	251,917	Total	$	145,314	$	28,768	$	52,082	$	226,164


(thousands of U.S. dollars)	(thousands of U.S. dollars)	Six Months Ended June 30, 2022								(thousands of U.S. dollars)	Nine Months Ended September 30, 2022
		Sterigenics		Nordion		Nelson Labs		Consolidated			Sterigenics		Nordion		Nelson Labs		Consolidated
Point in time	Point in time	$	307,254	$	79,671	$	—	$	386,925	Point in time	$	464,977	$	113,501	$	—	$	578,478
Over time	Over time	—		4,809		111,659		116,468		Over time	—		6,050		167,569		173,619
Total	Total	$	307,254	$	84,480	$	111,659	$	503,393	Total	$	464,977	$	119,551	$	167,569	$	752,097


(thousands of U.S. dollars)	(thousands of U.S. dollars)	Six Months Ended June 30, 2021								(thousands of U.S. dollars)	Nine Months Ended September 30, 2021
		Sterigenics		Nordion		Nelson Labs		Consolidated			Sterigenics		Nordion		Nelson Labs		Consolidated
Point in time	Point in time	$	276,333	$	73,671	$	—	$	350,004	Point in time	$	421,647	$	102,439	$	—	$	524,086
Over time	Over time	—		1,372		112,689		114,061		Over time	—		1,372		164,771		166,143
Total	Total	$	276,333	$	75,043	$	112,689	$	464,065	Total	$	421,647	$	103,811	$	164,771	$	690,229

Contract Balances

As of ~~June~~September 30, 2022, and December 31, 2021, contract assets included in “Prepaid expenses and other current assets” on the Consolidated Balance Sheets totaled approximately ~~$21.7~~$22.4 million and $15.6 million, respectively, resulting from revenue recognized over time in excess of the amount billed to the customer.

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Sotera Health Company

Notes to Consolidated Financial Statements

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. Deferred revenue totaled ~~$6.9~~$5.3 million and $8.7 million at ~~June~~September 30, 2022 and December 31, 2021, respectively. We recognize deferred revenue after all revenue recognition criteria are met.

4.Acquisitions

Acquisition of Regulatory Compliance Associates Inc.

On November 4, 2021, we acquired Regulatory Compliance Associates Inc. (“RCA”) for approximately $30.6 million, net of $0.6 million of cash acquired. RCA is an industry leader in providing life sciences consulting focused on quality, regulatory, and technical advisory services for the pharmaceutical, medical device and combination device industries. Headquartered in Pleasant Prairie, Wisconsin, RCA ~~will expand~~expands and further ~~strengthen the~~strengthens our technical consulting and expert advisory capabilities ofwithin our Nelson Labs segment.

The purchase price of RCA was allocated to the underlying assets acquired and liabilities assumed based upon management's estimated fair values at the date of acquisition. ~~Changes to the allocation of the purchase price may occur as these measurements are completed.~~ As of ~~June~~September 30, 2022, approximately ~~$25.2~~$25.3 million of goodwill was recorded related to the RCA acquisition, representing the excess of the purchase price over ~~preliminary~~the estimated fair values of all the assets acquired and liabilities assumed. ~~Based on our most recent estimates, we~~We also recorded $6.4 million of finite-lived intangible assets, primarily related to customer relationships. ~~The purchase price allocation will be finalized within a measurement period not to exceed one year from closing.~~ We funded this acquisition using available cash. The acquisition price and the results of operations for this acquired entity are not material in relation to our consolidated financial statements.

Acquisition of Noncontrolling Interests in China Subsidiaries

On May 18, 2021, we acquired the remaining 15% and 33% noncontrolling interests associated with our 2two subsidiaries located in China. As a result, both entities are now 100% owned by the Company. The purchase price of the remaining equity interests was approximately $8.6 million, net of the cancellation of an $0.8 million demand note. We paid 90% of the cash consideration on the acquisition date. The remaining amounts were partially settled in post-closing payments in the third quarter of 2021; $0.2 million of the post-closing payment ~~remain~~remains outstanding as of ~~June~~September 30, 2022 subject to the terms of the equity transfer agreements. As a result of the transactions, we continue to consolidate both of these subsidiaries, however, as of May 18, 2021, we no longer record noncontrolling interests in the consolidated financial statements as these subsidiaries are fully owned by the Company. The purchases were accounted for as equity transactions. As a result of these transactions, noncontrolling interests were reduced by $2.8 million reflecting the carrying value of the interest with $5.8 million of the difference charged to additional paid-in capital.

Acquisition of Mandatorily Redeemable Noncontrolling Interest - Nelson Labs Fairfield

On March 11, 2021, we completed the acquisition of the remaining 15% ownership of Nelson Labs Fairfield for $12.4 million, resulting in a gain of $1.2 million included in “Other expense (income), net” in the Consolidated Statements of Operations and Comprehensive Income (Loss) relative to the $13.6 million previously accrued. Pursuant to the terms of the acquisition, we initially acquired 85% of the equity interests of Nelson Labs Fairfield in August 2018 and were obligated to acquire the remaining 15% noncontrolling interest within three years from the date of the acquisition.

Acquisition of BioScience Laboratories, LLC

On March 8, 2021, we acquired BioScience Laboratories, LLC (“BioScience Labs”) for approximately $13.5 million, net of $0.2 million of cash acquired plus the contemporaneous repayment of BioScience ~~Lab's~~Labs’ outstanding debt of $1.9 million. BioScience Labs is a provider of outsourced topical antimicrobial product testing in the pharmaceutical, medical device, and consumer products industries with one location in Bozeman, Montana. BioScience Labs is included within the Nelson Labs segment.

~~Table of Contents~~

~~Sotera Health Company~~

~~Notes to Consolidated Financial Statements~~

The purchase price of BioScience Labs was allocated to the underlying assets acquired and liabilities assumed based upon management's estimated fair values at the date of acquisition. Approximately $8.4 million of goodwill was recorded related to the BioScience Labs acquisition, representing the excess of the purchase price over ~~preliminary~~the estimated fair values of all the assets acquired and liabilities assumed. We funded this acquisition using available cash. The acquisition price and the results of operations for this acquired entity are not material in relation to ~~our~~the Company's consolidated financial statements.

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Sotera Health Company

Notes to Consolidated Financial Statements

5.Inventories

Inventories consisted primarily of the following:


(thousands of U.S. dollars)	(thousands of U.S. dollars)					(thousands of U.S. dollars)
		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Raw materials and supplies	Raw materials and supplies	$	33,329	$	41,514	Raw materials and supplies	$	31,449	$	41,514
Work-in-process	Work-in-process	484		3,919		Work-in-process	389		3,919
Finished goods	Finished goods	5,961		8,979		Finished goods	5,429		8,979
		39,774		54,412			37,267		54,412
Reserve for excess and obsolete inventory	Reserve for excess and obsolete inventory	(122)		(124)		Reserve for excess and obsolete inventory	(114)		(124)
Inventories, net	Inventories, net	$	39,652	$	54,288	Inventories, net	$	37,153	$	54,288

6.Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted primarily of the following:


(thousands of U.S. dollars)	(thousands of U.S. dollars)					(thousands of U.S. dollars)
		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Prepaid taxes	Prepaid taxes	$	27,972	$	24,937	Prepaid taxes	$	29,735	$	24,937
Prepaid business insurance	Prepaid business insurance	5,070		10,707		Prepaid business insurance	1,871		10,707
Prepaid rent	Prepaid rent	1,153		920		Prepaid rent	1,111		920
Customer contract assets	Customer contract assets	21,746		15,565		Customer contract assets	22,387		15,565
Insurance and indemnification receivables	Insurance and indemnification receivables	4,245		3,144		Insurance and indemnification receivables	4,361		3,144
Current deposits	Current deposits	647		623		Current deposits	760		623
Prepaid maintenance contracts	Prepaid maintenance contracts	388		279		Prepaid maintenance contracts	385		279
Value added tax receivable	Value added tax receivable	1,128		2,512		Value added tax receivable	759		2,512
Prepaid software licensing	Prepaid software licensing	2,444		2,055		Prepaid software licensing	2,055		2,055
Stock supplies	Stock supplies	3,420		3,374		Stock supplies	3,597		3,374
Embedded derivatives	Embedded derivatives	1,389		496		Embedded derivatives	3,522		496
Other	Other	11,571		7,311		Other	11,130		7,311
Prepaid expenses and other current assets	Prepaid expenses and other current assets	$	81,173	$	71,923	Prepaid expenses and other current assets	$	81,673	$	71,923

7.Goodwill and Other Intangible Assets

Changes to goodwill during the ~~six~~nine months ended ~~June~~September 30, 2022 were as follows:


(thousands of U.S. dollars)	(thousands of U.S. dollars)	Sterigenics		Nordion		Nelson Labs		Total		(thousands of U.S. dollars)	Sterigenics		Nordion		Nelson Labs		Total
Goodwill at December 31, 2021	Goodwill at December 31, 2021	$	660,743	$	288,905	$	170,672	$	1,120,320	Goodwill at December 31, 2021	$	660,743	$	288,905	$	170,672	$	1,120,320
RCA acquisition measurement period adjustments	RCA acquisition measurement period adjustments	—		—		4,601		4,601		RCA acquisition measurement period adjustments	—		—		4,645		4,645
Changes due to foreign currency exchange rates	Changes due to foreign currency exchange rates	(1,857)		(4,307)		(2,755)		(8,919)		Changes due to foreign currency exchange rates	(5,982)		(21,748)		(4,766)		(32,496)
Goodwill at June 30, 2022		$	658,886	$	284,598	$	172,518	$	1,116,002
Goodwill at September 30, 2022										Goodwill at September 30, 2022	$	654,761	$	267,157	$	170,551	$	1,092,469

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Sotera Health Company

Notes to Consolidated Financial Statements

Other intangible assets consisted of the following:


(thousands of U.S. dollars)	(thousands of U.S. dollars)	Gross Carrying Amount		Accumulated Amortization		(thousands of U.S. dollars)	Gross Carrying Amount			Accumulated Amortization
As of June 30, 2022
As of September 30, 2022						As of September 30, 2022			Gross Carrying Amount			Accumulated Amortization
Finite-lived intangible assets	Finite-lived intangible assets					Finite-lived intangible assets
Customer relationships	Customer relationships	$	652,538	$	391,452	Customer relationships	$	644,236		$	402,253
Proprietary technology	Proprietary technology	87,177		47,793		Proprietary technology	84,392			48,446
Trade names	Trade names	2,555		452		Trade names	2,550			574
Land-use rights	Land-use rights	9,255		1,620		Land-use rights	8,715			1,579
Sealed source and supply agreements	Sealed source and supply agreements	214,744		91,341		Sealed source and supply agreements	201,496			88,712
Other	Other	5,679		2,673		Other	4,439			1,746
Total finite-lived intangible assets	Total finite-lived intangible assets	971,948		535,331		Total finite-lived intangible assets	945,828			543,310

Indefinite-lived intangible assets	Indefinite-lived intangible assets					Indefinite-lived intangible assets
Regulatory licenses and other(a)	Regulatory licenses and other(a)	80,878		—		Regulatory licenses and other(a)	75,888			—
Trade names / trademarks	Trade names / trademarks	25,562		—		Trade names / trademarks	25,349			—
Total indefinite-lived intangible assets	Total indefinite-lived intangible assets	106,440		—		Total indefinite-lived intangible assets	101,237			—
Total	Total	$	1,078,388	$	535,331	Total	$	1,047,065		$	543,310


As of December 31, 2021	Gross Carrying Amount		Accumulated Amortization
Finite-lived intangible assets
Customer relationships	$	668,628	$	365,935
Proprietary technology	88,826		44,866
Trade names	145		116
Land-use rights	9,744		1,586
Sealed source and supply agreements	241,611		109,838
Other	6,454		2,166
Total finite-lived intangible assets	1,015,408		524,507

Indefinite-lived intangible assets
Regulatory licenses and other(a)	82,110		—
Trade names / trademarks	25,833		—
Total indefinite-lived intangible assets	107,943		—
Total	$	1,123,351	$	524,507

(a)Includes certain transportation certifications, a class 1B nuclear license and other intangibles related to obtaining such licensure. These assets are considered indefinite-lived as the decision for renewal by the Canadian Nuclear Safety Commission is highly based on a licensee’s previous assessments, reported incidents, and annual compliance and inspection results. New applications for license can take a significant amount of time and cost; whereas an existing licensee with a historical record of compliance and current operating conditions more than likely ensures renewal for another 10 year license period as Nordion has demonstrated over its 75 years of history.

Amounts include the impact of foreign currency translation. Fully amortized amounts are written off.

Amortization expense for other intangible assets was ~~$21.2~~$20.2 million ($~~5.4~~4.5 million is included in “Cost of revenues” and ~~$15.8~~$15.7 million in “Selling, general and administrative expenses”) and ~~$41.4~~$61.6 million ($~~9.8~~14.3 million is included in “Cost of revenues” and ~~$31.6~~$47.3 million in “Selling, general and administrative expenses”) in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively.

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Sotera Health Company

Notes to Consolidated Financial Statements

Amortization expense for other intangible assets was ~~$21.8~~$21.2 million ($~~6.1~~5.3 million is included in “Cost of revenues” and ~~$15.7~~$15.9 million in “Selling, general and administrative expenses”) and ~~$44.1~~$65.3 million ($~~11.9~~17.2 million is included in “Cost of revenues” and ~~$32.2~~$48.1 million in “Selling, general and administrative expenses”) in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively.

The estimated aggregate amortization expense for finite-lived intangible assets for each of the next five years and thereafter is as follows:


(thousands of U.S. dollars)	(thousands of U.S. dollars)			(thousands of U.S. dollars)
For the remainder of 2022	For the remainder of 2022	$	40,551	For the remainder of 2022	$	19,779
2023	2023	81,166		2023	79,485
2024	2024	80,389		2024	78,709
2025	2025	43,028		2025	41,907
2026	2026	22,788		2026	21,872
Thereafter	Thereafter	168,695		Thereafter	160,766
Total	Total	$	436,617	Total	$	402,518

The weighted-average remaining useful life of the finite-lived intangible assets was approximately ~~8.8~~8.5 years as of ~~June~~September 30, 2022.

8.Accrued Liabilities

Accrued liabilities consisted of the following:


(thousands of U.S. dollars)	(thousands of U.S. dollars)					(thousands of U.S. dollars)
		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Accrued employee compensation	Accrued employee compensation	$	27,500	$	33,334	Accrued employee compensation	$	28,589	$	33,334
Legal reserves	Legal reserves	3,119		3,259		Legal reserves	3,267		3,259
Accrued interest expense	Accrued interest expense	782		10,755		Accrued interest expense	993		10,755
Embedded derivatives	Embedded derivatives	2,322		—		Embedded derivatives	4,745		—
Professional fees	Professional fees	7,972		4,314		Professional fees	8,196		4,314
Accrued utilities	Accrued utilities	1,671		1,797		Accrued utilities	1,885		1,797
Insurance accrual	Insurance accrual	1,781		2,068		Insurance accrual	2,220		2,068
Accrued taxes	Accrued taxes	3,291		2,209		Accrued taxes	3,196		2,209
Other	Other	4,220		4,125		Other	3,671		4,125
Accrued liabilities	Accrued liabilities	$	52,658	$	61,861	Accrued liabilities	$	56,762	$	61,861

9.Long-Term Debt

Long-term debt consisted of the following:


(thousands of U.S. dollars)	(thousands of U.S. dollars)					(thousands of U.S. dollars)
		June 30, 2022		December 31, 2021			September 30, 2022		December 31, 2021
Term loan, due 2026	Term loan, due 2026	$	1,763,100	$	1,763,100	Term loan, due 2026	$	1,763,100	$	1,763,100

Other long-term debt	Other long-term debt	450		450		Other long-term debt	450		450
Total long-term debt	Total long-term debt	1,763,550		1,763,550		Total long-term debt	1,763,550		1,763,550

Less current portion						Less current portion	—		—
Less unamortized debt issuance costs and debt discounts	Less unamortized debt issuance costs and debt discounts	(18,002)		(20,016)		Less unamortized debt issuance costs and debt discounts	(16,995)		(20,016)
Total long-term debt, less debt issuance costs and debt discounts	Total long-term debt, less debt issuance costs and debt discounts	$	1,745,548	$	1,743,534	Total long-term debt, less debt issuance costs and debt discounts	$	1,746,555	$	1,743,534

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Sotera Health Company

Notes to Consolidated Financial Statements

Debt Facilities

Senior Secured Credit Facilities

On December 13, 2019, Sotera Health Holdings, LLC (“SHH”), our wholly owned subsidiary, entered into senior secured first lien credit facilities (the “Senior Secured Credit Facilities”), consisting of both a prepayable senior secured first lien term loan (the “Term Loan”) and a senior secured first lien revolving credit facility (the “Revolving Credit Facility”) pursuant to a first lien credit agreement (the “Credit Agreement”). The Revolving Credit Facility and Term Loan mature on June 13, 2026, and December 13, 2026, respectively. The total borrowing capacity under the Revolving Credit Facility is $347.5 million. The Senior Secured Credit Facilities also provide SHH the right at any time and under certain conditions to request incremental term loans or incremental revolving credit commitments based on a formula defined in the Senior Secured Credit Facilities. As of ~~June~~September 30, 2022 and December 31, 2021, total borrowings under the Term Loan were $1,763.1 million ~~respectively,~~ and there were no borrowings outstanding on the Revolving Credit Facility. The weighted average interest rate on borrowings under the Term Loan for the three months ended ~~June~~September 30, 2022 and ~~June~~September 30, 2021 was ~~3.53%~~4.96% and 3.25%, respectively, and ~~3.39%~~3.92% and ~~3.64%~~3.51% for the ~~six~~nine months ended ~~June~~September 30, 2022 and ~~June~~September 30, 2021, respectively.

On January 20, ~~2021,~~2021, we closed on an amendment repricing our Term Loan. The interest rate spread over the London Interbank Offered Rate (“LIBOR”) on the facility was reduced from 450 basis points to 275 basis points, and the facility’s LIBOR floor was reduced from 100 basis points to 50 basis points. The changes resulted in an effective reduction in current interest rates of 225 basis points. In connection with this amendment, we wrote off $11.3 million of unamortized debt issuance and discount costs and incurred an additional $2.9 million of expense related to debt issuance costs attributable to the refinancing. These costs were recorded to “Loss on extinguishment of debt” in our Consolidated Statements of Operations and Comprehensive Income (Loss).

On March 26, 2021, we amended the Revolving Credit Facility, to (i) decrease the Applicable Rate (as defined in the Credit Agreement) related to any Revolving Loans (as defined in the Credit Agreement) from a rate per annum that ranged from an alternative base rate (“ABR”) plus 2.50% to ABR plus 3.00% depending on SHH’s Senior Secured First Lien Net Leverage Ratio to ABR plus 1.75%; and in the case of Eurodollar Loans (as defined in the Credit Agreement) from a rate per annum which ranged from the Adjusted LIBOR plus 3.50% to the Adjusted LIBOR plus 4.00% depending on SHH’s Senior Secured First Lien Net Leverage Ratio (as defined in the Credit Agreement), to the Adjusted LIBOR (as defined in the Credit Agreement) plus 2.75%, and (ii) extend the maturity date of the Revolving Facility from December 13, 2024 to June 13, 2026. The other material terms of the Credit Agreement ~~remain~~are unchanged and the amendment does not change the capacity of our Revolving Credit Facility. No unamortized debt issuance costs associated with the Revolving Credit Facility were written off and direct fees and costs incurred in connection with the amendment were immaterial.

As of ~~June~~September 30, 2022 and December 31, 2021, capitalized debt issuance costs totaled ~~$2.4~~$2.3 million and $2.7 million, respectively, and debt discounts totaled ~~$15.6~~$14.7 million and $17.3 million, respectively, related to the Senior Secured Credit Facilities. Such costs are recorded as a reduction of debt on our Consolidated Balance Sheets and amortized as a component of interest expense over the term of the debt agreement.

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Sotera Health Company

Notes to Consolidated Financial Statements

The Senior Secured Credit Facilities contain additional covenants that, among other things, restrict, subject to certain exceptions, our ability and the ability of our restricted subsidiaries to engage in certain activities, such as incur indebtedness or permit to exist any lien on any property or asset now owned or hereafter acquired, as specified in the Senior Secured Credit Facilities. The Senior Secured Credit Facilities also contain certain customary affirmative covenants and events of default, including upon a change of control. An event of default under the Senior Secured Credit Facilities would occur if the Company or certain of its subsidiaries received one or more enforceable judgments for payment in an aggregate amount in excess of $100.0 million, which judgment or judgments are not stayed or remain undischarged for a period of sixty consecutive days or if, in order to enforce such a judgment, a judgment creditor attached or levied upon assets that are material to the business and operations, taken as a whole, of the Company and certain of its subsidiaries. As described in Note 16, “Commitments and Contingencies”, on September 20, 2022, our subsidiaries Sterigenics U.S., LLC and Sotera Health LLC received a $358.7 million judgment (including prejudgment interest) in the first trial related to EO tort litigation in Illinois. Post-judgment interest accrues on the compensatory and punitive damages awards from September 20, 2022, the date the court entered the judgment order. As noted in Note 16, we intend to vigorously challenge the judgment through all appropriate post-trial motions and appeals processes. The payment of any judgment in this matter is expected to be stayed pending resolution of the post-trial and appeals process. Accordingly, no event of default has been triggered as a result of this judgment. As of ~~June~~September 30, 2022, we were in compliance with all the Senior Secured Credit Facilities covenants.

All of SHH’s obligations under the Senior Secured Credit Facilities 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 guarantees of such obligations, are secured by substantially all assets of the borrower and guarantors, subject to permitted liens and other exceptions and exclusions, as outlined in the Senior Secured Credit Facilities.

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~~Sotera Health Company~~

~~Notes to Consolidated Financial Statements~~

Outstanding letters of credit are collateralized by encumbrances against the Revolving Credit Facility and the collateral pledged thereunder, or by cash placed on deposit with the issuing bank. As of ~~June~~September 30, 2022, the Company had ~~$70.1~~$67.6 million of letters of credit issued against the Revolving Credit Facility, resulting in total availability under the Revolving Credit Facility of ~~$277.4~~$279.9 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 the Term Loan due to changes in LIBOR (or its successor). For additional information on the derivative instruments described above, refer to Note 17, “Financial Instruments and Financial Risk”, “Derivatives Instruments.”

First Lien Notes

On July 31, 2020, SHH issued $100.0 million aggregate principal amount of senior secured first lien notes due 2026 (the “First Lien Notes”), which were scheduled to mature on December 13, 2026. On August 27, 2021 SHH redeemed in full the $100.0 million aggregate principal amount of the First Lien Notes. In connection with this redemption, the Company paid a $3.0 million early redemption premium, in accordance with the terms of the First Lien Notes Indenture, and wrote off $3.4 million of debt issuance and discount costs. The Company recognized these expenses within “Loss on extinguishment of debt” in our Consolidated Statements of Operations and Comprehensive Income (Loss) for the ~~year~~three and nine months ended ~~December 31,~~September 30, 2021.

Prior to the redemption, the First Lien Notes bore interest at a rate equal to LIBOR subject to a 1.00% floor plus 6.00% per annum. Interest was payable on a quarterly basis with no principal due until maturity. The weighted average interest rate on the First Lien Notes during 2021 up to the August 27, 2021 redemption date was 7.00%.

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Sotera Health Company

Notes to Consolidated Financial Statements

Aggregate Maturities

Aggregate maturities of the Company’s long-term debt, excluding debt discounts, as of ~~June~~September 30, 2022, are as follows:


(thousands of U.S. dollars)
2022	$	—
2023	450
2024	—
2025	—
2026	1,763,100
Thereafter	—
Total	$	1,763,550

10.Income Taxes

Income tax expense is provided on an interim basis based upon our estimate of the annual effective income tax rate. In determining the estimated annual effective income tax rate, we analyze various factors, including projections of our annual earnings and the taxing jurisdictions where the earnings will occur, the impact of state and local taxes, our ability to utilize tax credits and net operating loss carryforwards and available tax planning alternatives.

Our effective tax rates were ~~36.8~~40.3 % and ~~34.6%~~36.4% for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, compared to ~~31.0%~~33.2% and ~~29.3%~~30.7% for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively.

Income tax expense for the three months ended ~~June~~September 30, 2022 differed from the statutory rate primarily due to a net increase in the valuation allowance, the impact of the foreign rate differential, and global intangible low-tax income (“GILTI”). The increase in the valuation allowance was attributable to the limitation on the deductibility of interest expense and the impairment of ~~the~~an investment in ~~Auralux. Provision for income~~a joint venture. Income tax expense for the three months ended ~~June~~September 30, 2021 ~~was offset by~~differed from the statutory rate primarily due to the impact of the foreign rate differential, GILTI and a ~~discrete item, which reversed~~net increase in the interest expense valuation ~~allowance on deferred tax assets related to certain asset retirement obligations.~~

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~~Sotera Health Company~~

~~Notes to Consolidated Financial Statements~~

allowance.

Income tax expense for the ~~six~~nine months ended ~~June~~September 30, 2022 differed from the statutory rate primarily due to a net increase in the valuation allowance, the impact of the foreign rate differential, and GILTI. ~~Provision for income~~Income tax expense for the ~~six~~nine months ended ~~June~~September 30, 2021 differed from the statutory rate primarily due to the impact of the foreign rate differential, GILTI, a net increase in the interest expense valuation allowance, and a discrete item pertaining to an income tax rate change in the United Kingdom. This was partially offset by an additional discrete item in the first quarter of 2021, which reversed the valuation allowance on deferred tax assets related to certain asset retirement obligations.

11.Employee Benefits

The Company sponsors various post-employment benefit plans including, in certain countries outside the U.S., defined benefit and defined contribution pension plans, retirement compensation arrangements, and plans that provide extended health care coverage to retired employees, the majority of which relate to Nordion.

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Sotera Health Company

Notes to Consolidated Financial Statements

Defined benefit pension ~~plan~~plans

The interest cost, expected return on plan assets and amortization of net actuarial loss are recorded in “Other ~~expense (income),~~income, net” and the service cost component is included in the same financial statement line item as the applicable employee’s wages in the Consolidated Statements of Operations and Comprehensive Income (Loss). The components of net periodic pension cost for the defined benefit ~~plan~~plans for the three and ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 were as follows:


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(thousands of U.S. dollars)	(thousands of U.S. dollars)	2022		2021		2022		2021		(thousands of U.S. dollars)	2022		2021		2022		2021
Service cost	Service cost	$	247	$	307	$	496	$	605	Service cost	$	242	$	300	$	738	$	905
Interest cost	Interest cost	1,889		1,662		3,792		3,275		Interest cost	1,848		1,622		5,640		4,897
Expected return on plan assets	Expected return on plan assets	(3,676)		(3,665)		(7,380)		(7,222)		Expected return on plan assets	(3,595)		(3,577)		(10,975)		(10,799)
Amortization of net actuarial loss	Amortization of net actuarial loss	—		275		—		542		Amortization of net actuarial loss	—		269		—		811
Net periodic benefit	Net periodic benefit	$	(1,540)	$	(1,421)	$	(3,092)	$	(2,800)	Net periodic benefit	$	(1,505)	$	(1,386)	$	(4,597)	$	(4,186)

Other benefit plans

Other benefit plans include a supplemental retirement arrangement, a retirement and termination allowance, and post-retirement benefit plans, which include contributory health and dental care benefits and contributory life insurance coverage. All but one, non-pension post-employment benefit plans are unfunded. The components of net periodic pension cost for the other benefit plans for the three and ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 were as follows:


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(thousands of U.S. dollars)	(thousands of U.S. dollars)	2022		2021		2022		2021		(thousands of U.S. dollars)	2022		2021		2022		2021
Service cost	Service cost	$	4	$	7	$	8	$	14	Service cost	$	4	$	7	$	12	$	21
Interest cost	Interest cost	65		61		130		120		Interest cost	63		59		193		179
Amortization of net actuarial (gain) loss		(2)		9		(4)		17
Amortization of net actuarial loss (gain)										Amortization of net actuarial loss (gain)	(2)		9		(6)		26
Net periodic benefit cost	Net periodic benefit cost	$	67	$	77	$	134	$	151	Net periodic benefit cost	$	65	$	75	$	199	$	226

We currently expect funding requirements of approximately $3.1 million in each of the next five years to fund the regulatory solvency deficit, as defined by Canadian federal regulation, which require solvency testing on defined benefit pension plans.

The Company may obtain a qualifying letter of credit for solvency payments, up to 15% of the market value of solvency liabilities as determined on the valuation date, instead of paying cash into the pension fund. As of ~~June~~September 30, 2022, and December 31, 2021, we had letters of credit outstanding relating to the defined benefit plans totaling ~~$46.9~~$45.2 million and $46.2 million, respectively. The actual funding requirements over the five-year period will be dependent on subsequent annual actuarial valuations. These amounts are estimates, which may change with actual investment performance, changes in interest rates, any pertinent changes in Canadian government regulations and any voluntary contributions.

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~~Sotera Health Company~~

~~Notes to Consolidated Financial Statements~~

12.Related Parties

We do business with a number of companies affiliated with Warburg Pincus and GTCR, which we refer to collectively as the ~~“Sponsors”.~~“Sponsors.” All transactions with these companies have been conducted in the ordinary course of our business and are not material to our operations.

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Sotera Health Company

Notes to Consolidated Financial Statements

13.Other Comprehensive Income (Loss)

Amounts in accumulated other comprehensive income (loss) are presented net of the related tax. Foreign currency translation is not adjusted for income taxes.

Changes in our accumulated other comprehensive income (loss) balances, net of applicable tax, were as follows:


(thousands of U.S. dollars)	(thousands of U.S. dollars)	Defined Benefit Plans			Foreign Currency Translation		Interest Rate Derivatives		Total		(thousands of U.S. dollars)	Defined Benefit Plans			Foreign Currency Translation		Interest Rate Derivatives		Total
Beginning balance – April 1, 2022		$	(17,855)		$	(51,414)	$	6,583	$	(62,686)
Beginning balance – July 1, 2022											Beginning balance – July 1, 2022	$	(17,323)		$	(97,452)	$	9,761	$	(105,014)
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	534			(46,038)		3,178		(42,326)		Other comprehensive income (loss) before reclassifications	1,067			(69,460)		9,408		(58,985)
Amounts reclassified from accumulated other comprehensive income (loss)	Amounts reclassified from accumulated other comprehensive income (loss)	(2)		(a)	—		—		(2)		Amounts reclassified from accumulated other comprehensive income (loss)	(2)		(a)	—		—		(2)
Net current-period other comprehensive income (loss)	Net current-period other comprehensive income (loss)	532			(46,038)		3,178		(42,328)		Net current-period other comprehensive income (loss)	1,065			(69,460)		9,408		(58,987)
Ending balance – June 30, 2022		$	(17,323)		$	(97,452)	$	9,761	$	(105,014)
Ending balance – September 30, 2022											Ending balance – September 30, 2022	$	(16,258)		$	(166,912)	$	19,169	$	(164,001)

Beginning balance – January 1, 2022	Beginning balance – January 1, 2022	$	(17,581)		$	(66,389)	$	404	(83,566)		Beginning balance – January 1, 2022	$	(17,581)		$	(66,389)	$	404	$	(83,566)
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	262			(31,063)		9,357		(21,444)		Other comprehensive income (loss) before reclassifications	1,329			(100,523)		18,765		(80,429)
Amounts reclassified from accumulated other comprehensive income (loss)	Amounts reclassified from accumulated other comprehensive income (loss)	(4)		(a)	—		—		(4)		Amounts reclassified from accumulated other comprehensive income (loss)	(6)		(a)	—		—		(6)
Net current-period other comprehensive income (loss)	Net current-period other comprehensive income (loss)	258			(31,063)		9,357		(21,448)		Net current-period other comprehensive income (loss)	1,323			(100,523)		18,765		(80,435)
Ending balance – June 30, 2022		$	(17,323)		$	(97,452)	$	9,761	$	(105,014)
Ending balance – September 30, 2022											Ending balance – September 30, 2022	$	(16,258)		$	(166,912)	$	19,169	$	(164,001)

(thousands of U.S. dollars)
Defined
Benefit
Plans
Foreign
Currency
Translation
Interest
Rate
Derivatives
Total
Beginning balance – April 1, 2021 $ (44,392) $ (52,770) $ — $ (97,162)
Other comprehensive income (loss) before
reclassifications
(705) 20,115 — 19,410
Amounts reclassified from accumulated other
comprehensive income (loss)
284 (a) — — 284
Net current-period other comprehensive income (loss) (421) 20,115 — 19,694
Ending balance – June 30, 2021 $ (44,813) $ (32,655) $ — $ (77,468)
Beginning balance – January 1, 2021 $ (44,143) $ (49,699) $ — $ (93,842)
Other comprehensive income (loss) before
reclassifications
(1,229) 17,044 — 15,815
Amounts reclassified from accumulated other
comprehensive income (loss)
559 (a) — — 559
Net current-period other comprehensive income (loss) (670) 17,044 — 16,374
Ending balance – June 30, 2021 $ (44,813) $ (32,655) $ — $ (77,468)

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~~Sotera Health Company~~

~~Notes to Consolidated Financial Statements~~


(thousands of U.S. dollars)	Defined Benefit Plans			Foreign Currency Translation		Interest Rate Derivatives		Total
Beginning balance – July 1, 2021	$	(44,813)		$	(32,655)	$	—	$	(77,468)
Other comprehensive income (loss) before reclassifications	1,105			(29,867)		—		(28,762)
Amounts reclassified from accumulated other comprehensive income (loss)	278		(a)	—		—		278
Net current-period other comprehensive income (loss)	1,383			(29,867)		—		(28,484)
Ending balance – September 30, 2021	$	(43,430)		$	(62,522)	$	—	$	(105,952)

Beginning balance – January 1, 2021	$	(44,143)		$	(49,699)	$	—	$	(93,842)
Other comprehensive income (loss) before reclassifications	(124)			(12,823)		—		(12,947)
Amounts reclassified from accumulated other comprehensive income (loss)	837		(a)	—		—		837
Net current-period other comprehensive income (loss)	713			(12,823)		—		(12,110)
Ending balance – September 30, 2021	$	(43,430)		$	(62,522)	$	—	$	(105,952)

(a)For defined benefit pension plans, amounts reclassified from accumulated other comprehensive income (loss) are recorded to “Other ~~expense (income),~~income, net” within the Consolidated Statements of Operations and Comprehensive Income (Loss).

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Notes to Consolidated Financial Statements

14.Share-Based Compensation

Pre-IPO Awards

Restricted stock distributed in respect of pre-IPO Class B-1 time vesting units vests on a daily basis pro rata over a five-year vesting period (20% per year) beginning on the original vesting commencement date of the corresponding Class B-1 time vesting units, subject to the grantee’s continued services through each vesting date. Upon the occurrence of a change in control of the Company, all then outstanding unvested shares of our common stock distributed in respect of Class B-1 Units will become vested as of the date of consummation of such change in control, subject to the grantee’s continued services through the consummation of the change in control.

Restricted stock distributed in respect of pre-IPO Class B-2 Units (which were considered performance vesting units) are scheduled to vest only upon satisfaction of certain thresholds. These units generally vest as of the first date on which (i) our Sponsors have received actual cash proceeds in an amount equal to or in excess of at least two and one-half times their invested capital in Sotera Health Topco Parent, L.P. (of which the Company was a direct wholly owned subsidiary prior to the IPO) and (ii) the Sponsors’ internal rate of return exceeds 20twenty percent, subject to such grantee’s continued services through such date. In the event of a change in control of the Company, any outstanding shares of our common stock distributed in respect of Class B-2 Units that remain unvested immediately following the consummation of such a change in control of the Company shall be immediately canceled and forfeited without compensation. Stock based compensation expense attributed to the pre-IPO Class B-2 awards was recorded in the fourth quarter of 2020 as the related performance conditions were considered probable of achievement and the implied service conditions were met. As of ~~June~~September 30, 2022, these awards remain unvested.

We recognized $0.5 million and $0.7 million of share-based compensation expense related to the pre-IPO Class B-1 awards for the three months ended ~~June~~September 30, 2022 and 2021, ~~respectively,~~ and ~~$1.1~~$1.6 million and ~~$1.3~~$2.0 million for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, respectively.

A summary of the activity for the ~~six~~nine months ended ~~June~~September 30, 2022 related to the restricted stock awards distributed to ~~the~~ Company service providers in respect of the pre-IPO awards (Class B-1 and B-2 Units) is presented below:


		Restricted Stock - Pre- IPO B-1	Restricted Stock - Pre- IPO B-2		Restricted Stock - Pre- IPO B-1	Restricted Stock - Pre- IPO B-2
Unvested at December 31, 2021	Unvested at December 31, 2021	1,206,089	2,023,959	Unvested at December 31, 2021	1,206,089	2,023,959

Forfeited	Forfeited	(32,614)	(136,252)	Forfeited	(32,614)	(925,544)
Vested	Vested	(251,639)	—	Vested	(345,926)	—
Unvested at June 30, 2022		921,836	1,887,707
Unvested at September 30, 2022				Unvested at September 30, 2022	827,549	1,098,415

2021 Omnibus Incentive Plan

We maintain a long-term incentive plan (the “2020 Omnibus Incentive Plan” or the “2020 Plan”) that allows for grants of incentive stock options to employees (including employees of any of our subsidiaries), nonstatutory stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and other cash-based, equity-based or equity-related awards to employees, directors, and consultants, including employees or consultants of our subsidiaries.

We recognized ~~$5.3~~$4.1 million ($~~2.2~~1.5 million for stock options and ~~$3.1~~$2.6 million for RSUs) and ~~$2.8~~$2.9 million ($1.3 million for stock options and ~~$1.5~~$1.6 million for RSUs) of share-based compensation expense for these awards for the three months ended ~~June~~September 30, 2022 and 2021, respectively. We recognized ~~$9.2~~$13.3 million ($~~3.7~~5.2 million for stock options and ~~$5.5~~$8.1 million for RSUs) and ~~$5.6~~$8.5 million ($~~2.5~~3.9 million for stock options and ~~$3.1~~$4.6 million for RSUs) for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, respectively in our Consolidated Statements of Operations and Comprehensive Income (Loss), in “Selling, general and administrative expenses.”

2021

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Notes to Consolidated Financial Statements

Stock Options

Stock options generally vest ratably over a period of three or four years. They have an exercise price equal to the fair market value of a share of common stock on the date of grant, and a contractual term of 10 years. The following table summarizes our stock option activity for the ~~six~~nine months ended ~~June~~September 30, 2022:


		Number of Shares	Weighted-average Exercise Price			Number of Shares	Weighted Average Exercise Price
At December 31, 2021	At December 31, 2021	2,423,256	$	23.02	At December 31, 2021	2,423,256	$	23.02
Granted	Granted	1,416,967	20.03		Granted	1,445,887	19.96
Forfeited	Forfeited	(61,393)	22.78		Forfeited	(454,953)	22.08
Exercised	Exercised	—	—		Exercised	—	—
At June 30, 2022		3,778,830	$	21.90
At September 30, 2022					At September 30, 2022	3,414,190	$	21.85

As of ~~June~~September 30, 2022, there were ~~0.6~~0.5 million stock options ~~vested.~~vested or exercisable.

RSUs

RSUs generally vest ratably over a period of one to four years and are valued based on our market price on the date of grant. The following table summarizes our unvested RSUs activity for the ~~six~~nine months ended ~~June~~September 30, 2022:


		Number of Shares	Weighted-average Grant Date Fair Value			Number of Shares	Weighted Average Grant Date Fair Value
Unvested at December 31, 2021	Unvested at December 31, 2021	640,122	$	23.19	Unvested at December 31, 2021	640,122	$	23.19
Granted	Granted	923,137	20.70		Granted	954,685	20.57
Forfeited	Forfeited	(37,499)	22.68		Forfeited	(145,656)	21.90
Vested	Vested	(88,459)	24.13		Vested	(89,121)	24.13
Unvested at June 30, 2022		1,437,301	$	21.55
Unvested at September 30, 2022					Unvested at September 30, 2022	1,360,030	$	21.43

15.Earnings Per Share

Basic earnings per share represents the amount of income attributable to each common share outstanding. Diluted earnings per share represents the amount of income attributable to each common share outstanding adjusted for the effects of potentially dilutive common shares. Potentially dilutive common shares include stock options and other stock-based awards. In the periods where the effect would be antidilutive, potentially dilutive common shares are excluded from the calculation of diluted earnings per share.

In periods in which the Company has net income, earnings per share is calculated using the two-class method. This method is required as unvested restricted stock distributed in respect of pre-IPO Class B-1 and B-2 awards have the right to receive non-forfeitable dividends or dividend equivalents if the Company were to declare dividends on its common stock. Pursuant to the two-class method, earnings for each period are allocated on a pro-rata basis to common stockholders and unvested pre-IPO Class B-1 and B-2 restricted stock awards. Diluted earnings per share is computed using the more dilutive of (a) the two-class method, or (b) treasury stock method, as applicable, to the potentially dilutive instruments.

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Notes to Consolidated Financial Statements

Our basic and diluted earnings per common share are calculated as follows:


		Three Months Ended				Six Months Ended					Three Months Ended				Nine Months Ended
in thousands of U.S. dollars and share amounts (except per share amounts)	in thousands of U.S. dollars and share amounts (except per share amounts)	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021		in thousands of U.S. dollars and share amounts (except per share amounts)	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Earnings:	Earnings:									Earnings:
Net income	Net income	$	30,418	$	42,615	$	61,059	$	53,680	Net income	$	25,090	$	27,444	$	86,149	$	81,124
Less: Net income attributable to noncontrolling interests	Less: Net income attributable to noncontrolling interests	—		16		—		239		Less: Net income attributable to noncontrolling interests	—		—		—		239
Less: Allocation to participating securities	Less: Allocation to participating securities	308		574		645		746		Less: Allocation to participating securities	223		343		862		1,089
Net income attributable to Sotera Health Company common shareholders	Net income attributable to Sotera Health Company common shareholders	$	30,110	$	42,025	$	60,414	$	52,695	Net income attributable to Sotera Health Company common shareholders	$	24,867	$	27,101	$	85,287	$	79,796
Weighted Average Common Shares:	Weighted Average Common Shares:									Weighted Average Common Shares:
Weighted-average common shares outstanding - basic	Weighted-average common shares outstanding - basic	279,990		279,078		279,910		278,953		Weighted-average common shares outstanding - basic	280,142		279,381		279,988		279,097
Dilutive effect of potential common shares	Dilutive effect of potential common shares	181		136		128		125		Dilutive effect of potential common shares	30		179		105		156
Weighted-average common shares outstanding - diluted	Weighted-average common shares outstanding - diluted	280,171		279,214		280,038		279,078		Weighted-average common shares outstanding - diluted	280,172		279,560		280,093		279,253
Earnings per Common Share:	Earnings per Common Share:									Earnings per Common Share:
Net income per common share attributable to Sotera Health Company common shareholders - basic	Net income per common share attributable to Sotera Health Company common shareholders - basic	$	0.11	$	0.15	$	0.22	$	0.19	Net income per common share attributable to Sotera Health Company common shareholders - basic	$	0.09	$	0.10	$	0.31	$	0.29
Net income per common share attributable to Sotera Health Company common shareholders - diluted	Net income per common share attributable to Sotera Health Company common shareholders - diluted	0.11		0.15		0.22		0.19		Net income per common share attributable to Sotera Health Company common shareholders - diluted	0.09		0.10		0.31		0.29

Diluted earnings per share does not consider the following potential common shares as the effect would be anti-dilutive:


		Three Months Ended		Six Months Ended			Three Months Ended		Nine Months Ended
in thousands of share amounts	in thousands of share amounts	June 30, 2022	June 30, 2021	June 30, 2022	June 30, 2021	in thousands of share amounts	September 30, 2022	September 30, 2021	September 30, 2022	September 30, 2021
Stock options	Stock options	3,780	2,404	3,337	2,404	Stock options	3,526	2,403	3,399	2,399
RSUs	RSUs	11	4	17	4	RSUs	1,121	5	34	7
Total anti-dilutive securities	Total anti-dilutive securities	3,791	2,408	3,354	2,408	Total anti-dilutive securities	4,647	2,408	3,433	2,406

16.Commitments and Contingencies

From time to time, we may be subject to various lawsuits and other claims, as well as gain contingencies, in the ordinary course of our business. In addition, from time to time, we receive communications from government or regulatory agencies concerning investigations or allegations of noncompliance with laws or regulations in jurisdictions in which we operate.

We establish reserves for specific liabilities in connection with regulatory and legal actions that we determine to be both probable and reasonably estimable. No material amounts have been accrued in our consolidated financial statements with respect to any loss ~~contingencies.~~contingencies as of September 30, 2022. 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, together with an estimate of the range of possible loss if determinable and material, would be disclosed. In certain of the matters described below, we are not able to make a reasonable estimate of any liability because of the uncertainties related to the outcome and/or the amount or range of loss. While it is not possible to determine the ultimate disposition of each of these matters, ~~we do not expect that~~a potential liability ultimately determined to be attributable to the ~~ultimate resolution of pending regulatory and legal matters~~Company may result in ~~future periods, including the matters described below, will have~~ a material ~~effect~~impact on ~~our~~the Company’s results of operations, liquidity or financial condition for the annual or ~~results of operations. Despite the above, the~~interim period during which such liability is accrued. The Company may also incur material defense and settlement costs, diversion of management resources and other adverse effects on our business, financial condition, or results of operations.

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Notes to Consolidated Financial Statements

Ethylene Oxide Tort Litigation

Sterigenics and other medical supply sterilization companies have been subjected to personal injury and related tort lawsuits alleging various injuries caused by low-level environmental exposure to EO emissions from sterilization facilities. Those lawsuits, as detailed further below, are individual claims, as opposed to class actions.

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Illinois

Approximately ~~780~~830 plaintiffs have filed lawsuits against subsidiaries of the Company and other parties, alleging personal injuries including cancer and other diseases, or wrongful death, resulting from purported emissions and releases of EO from Sterigenics U.S., LLC’s former Willowbrook facility. Additional derivative claims are alleged on behalf of other individuals related to some of these personal injury plaintiffs. Each plaintiff seeks damages in an amount to be determined by the trier of fact. The lawsuits were consolidated for pre-trial purposes by the Cook County Circuit Court, Illinois (the “Consolidated Case”). Plaintiffs ~~have not yet made any specific~~are expected to seek compensatory and punitive damages, ~~claims.~~

as permitted by law, in their individual trials. Fact discovery in the Consolidated Case concluded on February 1, 2022. On June 28, 2022 the Court granted summary judgment, dismissing plaintiffs’ ultrahazardous activity / strict liability claims and denying the remainder of the motions. ~~Three~~Two of the individual cases included in the Consolidated Case ~~have been~~are scheduled for trials in ~~2022.~~2022, and two are scheduled for trials in 2023. Plaintiffs in those ~~three~~four cases have been granted permission to seek punitive damage awards against subsidiaries of the Company and another party. The first trial ~~is now expected to begin~~began on August 12, ~~2022.~~2022, and on September 19, 2022, the jury rendered a verdict in favor of the plaintiff and awarded damages in the amount of $358.7 million, including $36.1 million of compensatory damages, $320.0 million of punitive damages and $2.6 million of prejudgment interest against our subsidiaries Sterigenics U.S., LLC and Sotera Health LLC. Post-judgment interest accrues on the compensatory and punitive damages awards from September 20, 2022, the date the court entered the judgment order. The ~~next two~~Company does not believe that the facts and law justify the verdict or damage awards and intends to vigorously challenge them through all appropriate motions for post-trial relief and appeals. The Company expects the enforceability of the judgment order to be stayed pending the resolution of motions for post-trial relief. In order to stay the enforceability of the judgment order during the appeals process under Illinois law, an appellate bond must be posted or an alternative form of security must be provided. Our subsidiaries are exploring options to post the appellate bond or to provide an alternative form of security, which could involve additional credit support from the Company, if the Company so determines, and/or posting cash collateral of the subsidiaries, or other form of security as may be required by the courts, and on which such subsidiaries will incur interest and other associated costs. The bond or other form of security ordinarily must be sufficient to cover the amount of the judgment and costs, plus interest reasonably anticipated to accrue during pendency of the appeal. Given the pendency of motions for post-trial relief requesting that the trial court enter judgment in defendants’ favor notwithstanding the verdict, or alternatively that a new trial be granted, or alternatively for reduction of the compensatory and punitive damages awards, as well as the courts’ ability to reduce the amount of any bond or other security, the amount of the bond or alternative form of security that will ultimately be required to be posted or provided is uncertain.

On October 26, 2022, Sterigenics U.S., LLC and Sotera Health LLC filed their motion for post-trial relief, requesting that the trial court enter judgment in their favor notwithstanding the verdict, or alternatively that a new trial be granted, and requesting reduction of the compensatory and punitive damages awards, based on the plaintiff’s failure of proof on elements of her claims, reversible errors by the trial court regarding evidentiary and other rulings, and excessive damages awards. We are unable to predict the date on which the trial court will decide the motion for post-trial relief. Subject to the nature and extent of the trial court's ruling on post-trial relief, we intend to file Notices of Appeal to the First District Appellate Court in Illinois within 30 days of such ruling.

We have taken into consideration the events that have occurred after the reporting period and before the financial statements were issued. Based on the status of the first individual case, we believe a loss is not probable, but the range of loss for this case could be from $0 to $358.7 million, plus potential post-judgment interest. We have not recorded a reserve with respect to this litigation as a number of factors (including post-trial relief and the appeals processes which are anticipated to take at least eighteen months or longer) could significantly change the assessment of damages and the ultimate outcome of the case.

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Notes to Consolidated Financial Statements

The Company believes the verdict in the first trial is not predictive of potential future verdicts in the other Illinois EO tort cases. The cases will be presided over by different judges, tried by different counsel presenting different evidence and fact and expert witness testimony at trial, and decided by different juries. Each plaintiff’s claim involves unique facts and evidence including but not limited to, the circumstances of plaintiff’s alleged exposure, the type and severity of the plaintiff’s disease and the plaintiff’s medical history and course of treatment. As a result, we believe that loss in such subsequent cases is not probable and it is not possible to estimate the range of loss. Due to the uncertainties associated with the amount of any such liability and/or the nature of any other remedy which may be imposed in such litigation, any potential liability determined to be attributable to the Company arising out of such litigation may have a material adverse effect on the Company’s results of operations, liquidity or financial condition. An estimate of the potential impact on the Company’s results of operations, liquidity or financial condition cannot be made due to the aforementioned uncertainties.

The second individual trial began in Cook County, IL on October 6, 2022 and is underway. Subsequent individual trials are currently scheduled to begin in January 2023 and April 2023. At a recent hearing, the ~~third~~court indicated that the claims of small groups of plaintiffs should be tried jointly, starting in late May 2023. The parties have been instructed to confer to identify plaintiffs whose claims could be tried jointly because the details of their individual claims are similar. We expect to know more in mid-November about whether joint trials are possible and ~~fourth quarters of 2022, followed by five~~when they will be scheduled. Even if joint trials proceed, they will remain individual ~~trials scheduled to occur consecutively, beginning in the first quarter of 2023. Additional trial dates are expected to be announced on September 7, 2022.~~actions, not class actions.

Georgia

Since August 17, 2020, approximately 300 plaintiffs have filed lawsuits against subsidiaries of the Company and other parties in the State Court of Cobb County, Georgia and the State Court of Gwinnett County, Georgia alleging that they suffered personal injuries resulting from emissions and releases of EO from Sterigenics’ Atlanta facility. Additional derivative claims are alleged on behalf of other individuals related to some of these personal injury plaintiffs. Our subsidiaries are also defendants in two lawsuits alleging that the Atlanta facility has devalued and harmed plaintiffs’ use of real properties they own in Smyrna, Georgia and caused other damages. These personal injury and property devaluation plaintiffs seek various forms of relief including damages. All but ~~two~~one of the personal injury lawsuits pending in Cobb County have been consolidated for pretrial purposes. The Court has entered a phased case management schedule for a “pool” of ten of the consolidated cases by which threshold general causation issues will be decided in Phase 1, followed by specific causation issues in Phase 2 as to any of the pooled cases that survive Phase 1. The Court has stayed the remainder of the consolidated personal injury cases pending in Cobb County and an immediate appeal of a discrete procedural issue is being pursued by the defendants. One personal injury case is pending in Gwinnett County and is scheduled for trial in ~~June~~October 2023. The remaining ~~two~~ personal injury ~~cases~~case and two property devaluation cases are in various stages of pleadings and motions practice and fact discovery.

Georgia Facility Operations Litigation

In October 2019, while Sterigenics had voluntarily suspended the facility’s operations to install emissions reduction enhancements at its Atlanta facility, Cobb County, Georgia officials asserted that the facility had an incorrect “certificate of occupancy” and could not resume operations without obtaining a new certificate of occupancy after a third-party code compliance review. On March 30, 2020 Sterigenics filed suit against Cobb County, Georgia and certain of its officials for wrongfully interfering with operations of the facility. On April 1, 2020 Sterigenics won a Temporary Restraining Order prohibiting Cobb County officials from interfering with the facility’s normal operations, which relief has been extended until entry of a final judgment in the case. ~~The~~All parties ~~are conducting expert discovery,~~have filed motions for summary judgment which remain pending. Trial is scheduled to ~~end in September 2022. A Modified Scheduling Order was entered~~begin on ~~July 14, 2022, including that trial will take place no later than March~~January 24, 2023.

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Notes to Consolidated Financial Statements

New Mexico Attorney General Litigation

On December 22, 2020, the New Mexico Attorney General filed a lawsuit in the Third Judicial District Court, Doña Ana County, New Mexico against the Company and certain subsidiaries alleging that emissions of EO from Sterigenics’ sterilization facility in Santa Teresa, New Mexico have deteriorated the air quality in Santa Teresa and surrounding communities and materially contributed to increased health risks suffered by residents of those communities. The Complaint asserts claims for public nuisance, negligence, strict liability, violations of New Mexico’s Public Nuisance Statute and Unfair Practices Act and seeks various forms of relief including a temporary restraining order and preliminary injunctive relief and damages. On June 29, 2021, the Court entered an Order Granting Preliminary Injunction (the “Order”). The Order does not require closure of the facility, but prohibits Sterigenics from allowing any uncontrolled emission or release of EO from the facility. On December 20,

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~~Notes to Consolidated Financial Statements~~

2021 the Court entered an order identifying a protocol to monitor Sterigenics’ compliance with the Order. A motion challenging the Court’s jurisdiction over ~~the~~Sotera Health Company and ~~certain other defendants has been held in abeyance until the completion of jurisdictional discovery,~~another defendant is pending and all other motions to dismiss have been denied. ~~The parties are conducting fact discovery.~~A Scheduling Order was entered on September 13, 2022, including a June 3, 2024 trial date.

* * *

Our insurance for litigation related to alleged environmental liabilities, like the litigation pending in Illinois, Georgia and New Mexico described above has limits of $10.0 million per occurrence and $20.0 million in the aggregate. The per occurrence limit related to the Willowbrook, Illinois litigation was fully utilized by June 30, 2020. The remaining $10.0 million limit is currently being utilized for occurrences related to the EO litigation in Georgia and New Mexico described above. As of ~~June~~September 30, 2022, we have utilized approximately ~~$6.0~~$7.5 million of the remaining $10.0 million limit. Our insurance for future alleged environmental liabilities excludes coverage for EO claims.

In addition, we are pursuing other insurance coverage for our legal expenses related to the EO tort litigation. In 2021, Sterigenics U.S., LLC filed an insurance coverage lawsuit in the U.S. District Court for the Northern District of Illinois relating to two commercial general liability policies issued in the 1980s. On August 3, 2022, the Court issued a Memorandum Opinion and Order concluding that the insurer owes Sterigenics U.S., LLC and another insured party a duty to defend the Willowbrook, Illinois litigation, which may allow us to recover defense costs related to that litigation.

17.Financial Instruments and Financial Risk

Derivative Instruments

We do not use derivatives for trading or speculative purposes and are not a party to leveraged derivatives.

Derivatives Designated in Hedge Relationships

From time to time, the Company utilizes interest rate derivatives designated in hedge relationships to manage interest rate risk associated with our variable rate borrowings. These instruments are measured at fair value with changes in fair value recorded as a component of “Accumulated other comprehensive income (loss)” on our Consolidated Balance Sheets.

In May 2022, we entered into 2two interest rate cap agreements with a combined notional amount of $1,000.0 million for a total option premium of $4.1 million. The interest rate caps have a forward start date of July 31, 2023 and expire on July 31, 2024. We have designated these interest rate caps as cash flow hedges designed to hedge the variability of cash flows attributable to changes in the benchmark interest rate of our Term Loan. Under the current terms of the loan agreement, the benchmark interest rate index is expected to transition from LIBOR to the term Secured Overnight Financing Rate (“SOFR”) at the earlier of June 30, 2023 or the Company’s election to “early opt-in” to SOFR. Accordingly, the interest rate cap agreements hedge the variability of cash flows attributable to changes in SOFR by limiting our cash flow exposure related to the term SOFR under a portion of our variable rate borrowings to 3.5%.

In October 2021, we entered into 2two interest rate cap agreements with a combined notional amount of $1,000.0 million for a total option premium of $1.8 million. Both interest rate caps have a forward start date of December 31, 2022 and expire on July 31, 2023. These interest rate caps are designated as cash flow hedges and are designed to hedge the variability of cash flows attributable to changes in LIBOR (or its successor), the benchmark interest rate being hedged, by limiting our cash flow exposure related to the LIBOR base rate under a portion of our variable rate borrowings to 1.0%.

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Notes to Consolidated Financial Statements

Derivatives Not Designated in Hedge Relationships

Additionally, from time to time, the Company enters into interest rate derivatives to manage economic risks associated with our variable rate borrowings that are not designated in hedge relationships. These instruments are recorded at fair value on the Consolidated Balance Sheets, with any changes in the value recorded in “Interest expense, net” in the Consolidated Statements of Operations and Comprehensive Income (Loss).

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~~Notes to Consolidated Financial Statements~~

In June 2020, SHH entered into 2two interest rate cap agreements with notional amounts of $1,000.0 million and $500.0 million, respectively, for a total option premium of $0.3 million. These instruments were initially scheduled to terminate on August 31, 2021 and February 28, 2022, respectively. The interest rate caps limit our cash flow exposure related to the LIBOR base rate under a portion of our variable rate borrowings to 1%1.0%. In February 2021, we amended the 2two interest rate cap agreements referenced above to reduce the strike rate from 1%1.0% to 0.5%. Premiums paid to amend the interest rate caps were immaterial.

We also entered into 2two additional interest rate cap agreements in February 2021 with a combined notional amount of $1,000.0 million, for a total option premium of $0.4 million. These instruments were effective September 30, 2021, and will terminate on December 31, 2022. The amended and new interest rate caps limit our cash flow exposure related to LIBOR under a portion of our variable rate borrowings to 0.5%.

The Company also entered into foreign currency forward contracts to manage foreign currency exchange rate risk of our intercompany loans in certain of our international subsidiaries. The foreign currency forward contracts expire on a monthly basis. The fair value of the outstanding foreign currency forward contracts was zero as of ~~June~~September 30, 2022 and December 31, 2021, respectively.

Embedded Derivatives

We have embedded derivatives in certain of our customer and supply contracts as a result of the currency of the contract being different from the functional currency of the parties involved. Changes in the fair value of the embedded derivatives are recognized in “Other ~~expense (income),~~income, net” in the Consolidated Statements of Operations and Comprehensive Income (Loss).

The following table provides a summary of the notional and fair values of our derivative instruments:


		June 30, 2022							December 31, 2021							September 30, 2022							December 31, 2021
(in U.S. Dollars; notional in millions, fair value in thousands)	(in U.S. Dollars; notional in millions, fair value in thousands)				Fair Value						Fair Value				(in U.S. Dollars; notional in millions, fair value in thousands)				Fair Value						Fair Value
		Notional Amount			Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities			Notional Amount			Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities
Derivatives designated as hedging instruments:	Derivatives designated as hedging instruments:														Derivatives designated as hedging instruments:
Interest rate caps	Interest rate caps	$	2,000.0	(a)	$	19,144	$	—	$	1,000.0	$	2,322	$	—	Interest rate caps	$	2,000.0	(a)	$	31,920	$	—	$	1,000.0	$	2,322	$	—
Derivatives not designated as hedging instruments:	Derivatives not designated as hedging instruments:														Derivatives not designated as hedging instruments:
Interest rate caps	Interest rate caps	$	1,000.0		$	11,100	$	—	$	1,500.0	$	1,654	$	—	Interest rate caps	$	1,000.0		$	7,752	$	—	$	1,500.0	$	1,654	$	—
Embedded derivatives	Embedded derivatives	190.7		(b)	1,389		2,322		144.4		496		—		Embedded derivatives	183.6		(b)	3,522		4,745		144.4		496		—
Total	Total	$	3,190.7		$	31,633	$	2,322	$	2,644.4	$	4,472	$	—	Total	$	3,183.6		$	43,194	$	4,745	$	2,644.4	$	4,472	$	—

(a)$1,000.0 million and $1,000.0 million notional amount of interest rate caps designated as hedging instruments have forward start dates beginning on December 31, 2022 and July 31, 2023, respectively.

(b)Represents the total notional amounts for certain of the Company’s supply and sales contracts accounted for as embedded derivatives.

Embedded derivative assets and interest rate caps are included in “Prepaid expenses and other current assets” and “Other assets,” respectively, on the Consolidated Balance Sheets depending upon their respective maturity dates. Embedded derivative liabilities are included in “Accrued liabilities” on the Consolidated Balance Sheets.

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The following tables summarize the activities of our derivative instruments for the periods presented, and the line item they are recorded in the Consolidated Statements of Operations and Comprehensive Income (Loss):

(thousands of U.S. dollars) Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Unrealized (gain) loss on interest rate caps recorded in interest expense, net $ (3,100) $ 293 $ (9,446) $ 383
Realized gain on interest rate caps recorded in interest expense, net (1,279) — (1,279) —
Unrealized loss (gain) on embedded derivatives recorded in other expense (income), net 2,435 (761) 1,417 (1,614)
Realized loss (gain) on foreign currency forward contracts recorded in foreign exchange (gain) loss 1,035 231 (495) (2,143)


(thousands of U.S. dollars)	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Unrealized loss (gain) on interest rate caps recorded in interest expense, net	$	3,348	$	(116)	$	(6,098)	$	267
Unrealized loss (gain) on embedded derivatives recorded in other expense (income), net	359		1,189		1,776		(424)
Realized gain on interest rate caps recorded in interest expense, net	(4,473)		—		(5,752)		—
Realized loss (gain) on foreign currency forward contracts recorded in foreign exchange (gain) loss	4,157		762		3,662		(1,381)

The following table summarizes the net gains on our cash flow hedges recognized in “Other comprehensive income (loss)” during the period:


(thousands of U.S. dollars)	(thousands of U.S. dollars)	Three Months Ended June 30,				Six Months Ended June 30,					(thousands of U.S. dollars)	Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021			2022		2021			2022		2021			2022		2021
Unrealized gain on interest rate derivatives recorded in other comprehensive income (loss), net of tax	Unrealized gain on interest rate derivatives recorded in other comprehensive income (loss), net of tax	$	3,178	$	—		$	9,357	$	—	Unrealized gain on interest rate derivatives recorded in other comprehensive income (loss), net of tax	$	9,408	$	—		$	18,765	$	—

We expect to reclassify approximately ~~$12.5~~$22.8 million of after-tax net gains on derivative instruments from accumulated other comprehensive income (loss) to income during the next 12 months associated with our cash flow hedges.

Credit Risk

Certain of our financial assets, including cash and cash equivalents, are exposed to credit risk.

We are also exposed, in our normal course of business, to credit risk from our customers. As of ~~June~~September 30, 2022 and December 31, 2021, accounts receivable was net of an allowance for uncollectible accounts of ~~$1.8~~$1.4 million and $1.3 million, respectively.

Credit risk on financial instruments arises from the potential for counterparties to default on their contractual obligations to us. We are exposed to credit risk in the event of non-performance, but do not anticipate non-performance by any of the counterparties to our financial instruments. We limit our credit risk by dealing with counterparties that are considered to be of high credit quality. In the event of non-performance by counterparties, the carrying value of our financial instruments represents the maximum amount of loss that would be incurred.

Our credit team evaluates and regularly monitors changes in the credit risk of our customers. We routinely assess the collectability of accounts receivable and maintain an adequate allowance for uncollectible accounts to address potential credit losses. The process includes a review of customer financial information and credit ratings, current market conditions as well as the expected future economic conditions that may impact the collection of trade receivables. We regularly review our customers' past due amounts through an analysis of aged accounts receivables, specific customer past due aging amounts, and the history of trade receivables written off. Upon concluding that a receivable balance is not collectible, the balance is written off against the allowance for uncollectible accounts.

Fair Value Hierarchy

The fair value of our financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The valuation techniques we would use to determine such fair values are described as follows: Level 1—fair values determined by inputs utilizing quoted prices in active markets for identical assets or liabilities; Level 2—fair values based on observable inputs other than quoted prices included in Level 1, such

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markets that are not active, or other inputs that are observable; Level 3—fair values determined by unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants.

The following table discloses the fair value of our financial assets and liabilities:


As of June 30, 2022				Fair Value
As of September 30, 2022										As of September 30, 2022			Fair Value
(thousands of U.S. dollars)	(thousands of U.S. dollars)	Carrying Amount		Level 1		Level 2		Level 3		(thousands of U.S. dollars)	Carrying Amount		Level 1	Level 2		Level 3
Derivatives designated as hedging instruments(a)	Derivatives designated as hedging instruments(a)									Derivatives designated as hedging instruments(a)
Derivative assets - interest rate caps		$	19,144	$	—	$	19,144	$	—
Interest rate caps										Interest rate caps	$	31,920	—	$	31,920	—
Derivatives not designated as hedging instruments(b)	Derivatives not designated as hedging instruments(b)									Derivatives not designated as hedging instruments(b)
Derivative assets - interest rate caps		11,100		—		11,100		—
Interest rate caps										Interest rate caps	7,752		—	7,752		—
Embedded derivative assets	Embedded derivative assets	1,389		—		1,389		—		Embedded derivative assets	3,522		—	3,522		—
Embedded derivative liabilities	Embedded derivative liabilities	2,322		—		2,322		—		Embedded derivative liabilities	4,745		—	4,745		—
Long-Term Debt(c)	Long-Term Debt(c)									Long-Term Debt(c)
Term loan, due 2026	Term loan, due 2026	1,745,102		—		1,679,353		—		Term loan, due 2026	1,746,109		—	1,604,421		—
Other long-term debt	Other long-term debt	446		—		446		—		Other long-term debt	446		—	446		—
Finance Lease Obligations (with current portion)(d)	Finance Lease Obligations (with current portion)(d)	58,755		—		58,755		—		Finance Lease Obligations (with current portion)(d)	56,526		—	56,526		—


As of December 31, 2021	As of December 31, 2021			Fair Value						As of December 31, 2021			Fair Value
(thousands of U.S. dollars)	(thousands of U.S. dollars)	Carrying Amount		Level 1		Level 2		Level 3		(thousands of U.S. dollars)	Carrying Amount		Level 1		Level 2		Level 3
Derivatives designated as hedging instruments(a)	Derivatives designated as hedging instruments(a)									Derivatives designated as hedging instruments(a)
Derivative assets - interest rate caps		$	2,322	$	—	$	2,322	$	—
Interest rate caps										Interest rate caps	$	2,322	$	—	$	2,322	$	—
Derivatives not designated as hedging instruments(b)	Derivatives not designated as hedging instruments(b)									Derivatives not designated as hedging instruments(b)
Derivative assets - interest rate caps		1,654		—		1,654		—
Interest rate caps										Interest rate caps	1,654		—		1,654		—
Embedded derivative liabilities	Embedded derivative liabilities	496		—		496		—		Embedded derivative liabilities	496		—		496		—
Long-Term Debt(c)	Long-Term Debt(c)									Long-Term Debt(c)
Term loan, due 2026	Term loan, due 2026	1,743,090		—		1,754,285		—		Term loan, due 2026	1,743,090		—		1,754,285		—
Other long-term debt	Other long-term debt	444		—		444		—		Other long-term debt	444		—		444		—
Finance Lease Obligations (with current portion)(d)	Finance Lease Obligations (with current portion)(d)	42,037		—		42,037		—		Finance Lease Obligations (with current portion)(d)	42,047		—		42,037		—

(a)Derivatives designated as hedging instruments are measured at fair value with changes in fair value recorded as a component of accumulated other comprehensive income (loss). Interest rate caps are valued using pricing models that incorporate observable market inputs including interest rate and yield curves.

(b)Derivatives that are not designated as hedging instruments are measured at fair value with gains or losses recognized immediately in the Consolidated Statements of Operations and Comprehensive Income (Loss). Interest rate caps are valued using pricing models that incorporate observable market inputs including interest rate and yield curves. Embedded derivatives are valued using internally developed models that rely on observable market inputs including foreign currency forward curves.

(c)Carrying amounts of long-term debt instruments are reported net of discounts and debt issuance costs. The estimated fair value of these instruments is based upon quoted prices for the Term Loan due 2026 in inactive markets as provided by an independent fixed income security pricing service. Fair value approximates carrying value for “Other long-term debt.”

(d)Fair value approximates carrying value.

18.Segment Information

We identify our operating segments based on the way we manage, evaluate and internally report our business activities for purposes of allocating resources and assessing performance. We have 3three reportable segments: Sterigenics, Nordion and Nelson Labs. We have determined our reportable segments based upon an assessment of organizational structure, service types, ~~and internally prepared financial statements. Our chief operating decision maker evaluates performance and allocates resources~~

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and internally prepared financial statements. Our chief operating decision maker evaluates performance and allocates resources based on net revenues and segment income after the elimination of intercompany activities. The accounting policies of our reportable segments are the same as those described in Note 1, “Significant Accounting Policies” of our 2021 Form 10-K.

Sterigenics

Sterigenics provides outsourced terminal sterilization and irradiation services for the medical device, pharmaceutical, food safety and advanced applications markets using three major technologies: gamma irradiation, EO processing and E-beam irradiation.

Nordion

Nordion is a leading global provider of Co-60 used in the sterilization and irradiation processes for the medical device, pharmaceutical, food safety, and high-performance materials industries, as well as in the treatment of cancer. In addition, Nordion is a leading global provider of gamma irradiation systems.

Nelson Labs

Nelson Labs provides outsourced microbiological and analytical chemistry testing and advisory services for the medical device and pharmaceutical industries.

For the three months ended ~~June~~September 30, 2022, three customers reported within the Nordion segment individually represented 10% or more of the segment’s total net revenues. These customers represented 21.0%, 14.7%, and 10.1% of the total segment’s external net revenues for the three months ended September 30, 2022. For the three months ended September 30, 2021, four customers reported within the Nordion segment individually represented 10% or more of the segment’s total net revenues. These customers represented 20.4%, 12.8%, 12.8%, and 10.3% of the total segment’s external net revenues for the three months ended September 30, 2021.

For the nine months ended September 30, 2022, four customers reported within the Nordion segment individually represented 10% or more of the segment’s total net revenues. These customers represented ~~21.7%~~17.1%, ~~15.4%~~16.2%, ~~13.2%~~11.8% , and ~~15.9%~~11.7% of the total segment’s external net revenues for the ~~three~~nine months ended ~~June~~September 30, 2022. For the ~~three~~nine months ended ~~June~~September 30, 2021, ~~two~~five customers reported within the Nordion segment individually represented 10% or more of the segment’s total net revenues. These customers represented ~~17.9% and 16.1% of the total segment’s external net revenues for the three months ended June 30, 2021.~~

For the six months ended June 30, 2022, four customers reported within the Nordion segment individually represented 10% or more of the segment’s total net revenues. These customers represented 18.8%, 15.5%13.2%, 12.8%, and 10.6% of the total segment’s external net revenues for the six months ended June 30, 2022. For the six months ended June 30, 2021, four customers reported within the Nordion segment individually represented 10% or more of the segment’s total net revenues. These customers represented 14.8%12.6%, ~~13.1%, 12.6%~~12.3%, and 10.5% of the total segment's external net revenues for the ~~six~~nine months ended ~~June~~September 30, 2021.

Financial information for each of our segments is presented in the following table:


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(thousands of U.S. dollars)	(thousands of U.S. dollars)	2022		2021		2022		2021		(thousands of U.S. dollars)	2022		2021		2022		2021
Segment revenues(a)	Segment revenues(a)									Segment revenues(a)
Sterigenics	Sterigenics	$	157,792	$	145,182	$	307,254	$	276,333	Sterigenics	$	157,723	$	145,314	$	464,977	$	421,647
Nordion	Nordion	50,478		49,125		84,480		75,043		Nordion	35,071		28,768		119,551		103,811
Nelson Labs	Nelson Labs	58,369		57,610		111,659		112,689		Nelson Labs	55,910		52,082		167,569		164,771
Total net revenues	Total net revenues	$	266,639	$	251,917	$	503,393	$	464,065	Total net revenues	$	248,704	$	226,164	$	752,097	$	690,229
Segment income(b)	Segment income(b)									Segment income(b)
Sterigenics	Sterigenics	$	85,098	$	79,569	$	164,501	$	148,030	Sterigenics	$	85,587	$	79,344	$	250,088	$	227,374
Nordion	Nordion	29,982		31,168		48,885		44,954		Nordion	20,294		16,331		69,179		61,285
Nelson Labs	Nelson Labs	21,055		23,826		38,098		46,896		Nelson Labs	19,271		20,999		57,369		67,895
Total segment income	Total segment income	$	136,135	$	134,563	$	251,484	$	239,880	Total segment income	$	125,152	$	116,674	$	376,636	$	356,554

(a)Revenues are reported net of intersegment sales. Our Nordion segment recognized ~~$15.8~~$7.4 million and ~~$7.0~~$3.7 million in revenues from sales to our Sterigenics segment for the three months ended ~~June~~September 30, 2022 and 2021, and ~~$31.3~~$38.7 million and ~~$17.5~~$21.2 million in revenues from sales to our Sterigenics segment for the ~~six~~nine months ended ~~June~~September 30,

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2022 and 2021, respectively, that is not reflected in net revenues in the table above. Intersegment sales for Sterigenics and Nelson Labs are immaterial for these periods.

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(b)Segment income is only provided on a net basis to the chief operating decision maker and is reported net of intersegment profits.

Corporate operating expenses for executive management, accounting, information technology, legal, human resources, treasury, investor relations, corporate development, tax, purchasing, and marketing not directly incurred by a segment are allocated to the segments based on total net revenue. Corporate operating expenses that are directly incurred by a segment are reflected in each segment’s income.

Capital expenditures by segment for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021 were as follows:


		Six Months Ended June 30,					Nine Months Ended September 30,
(thousands of U.S. dollars)	(thousands of U.S. dollars)	2022		2021		(thousands of U.S. dollars)	2022		2021
Sterigenics	Sterigenics	$	55,065	$	35,851	Sterigenics	$	90,444	$	48,552
Nordion	Nordion	10,741		6,376		Nordion	12,045		7,531
Nelson Labs	Nelson Labs	5,836		2,562		Nelson Labs	8,153		4,815
Total capital expenditures	Total capital expenditures	$	71,642	$	44,789	Total capital expenditures	$	110,642	$	60,898

Total assets and depreciation and amortization expense by segment are not readily available and are not reported separately to the chief operating decision maker.

A reconciliation of segment income to consolidated income before taxes is as follows:


(thousands of U.S. dollars)	(thousands of U.S. dollars)	Three Months Ended June 30,				Six Months Ended June 30,				(thousands of U.S. dollars)	Three Months Ended September 30,				Nine Months Ended September 30,
		2022		2021		2022		2021			2022		2021		2022		2021
Segment income	Segment income	$	136,135	$	134,563	$	251,484	$	239,880	Segment income	$	125,152	$	116,674	$	376,636	$	356,554
Less adjustments:	Less adjustments:									Less adjustments:
Interest expense, net(a)	Interest expense, net(a)	17,144		19,163		33,894		40,445		Interest expense, net(a)	20,080		18,140		53,974		58,585
Depreciation and amortization(b)	Depreciation and amortization(b)	36,939		37,461		72,988		75,122		Depreciation and amortization(b)	36,104		37,634		109,092		112,756
Share-based compensation(c)	Share-based compensation(c)	5,801		3,493		10,339		6,942		Share-based compensation(c)	4,616		3,547		14,955		10,489

Gain on foreign currency and derivatives not designated as hedging instruments, net(d)	Gain on foreign currency and derivatives not designated as hedging instruments, net(d)	(1,430)		(660)		(7,982)		(996)		Gain on foreign currency and derivatives not designated as hedging instruments, net(d)	3,194		1,881		(4,788)		885
Acquisition and divestiture related charges, net(e)	Acquisition and divestiture related charges, net(e)	691		844		531		659		Acquisition and divestiture related charges, net(e)	447		(2,662)		978		(2,003)
Business optimization project expenses(f)	Business optimization project expenses(f)	470		275		574		536		Business optimization project expenses(f)	1,035		244		1,609		780
Plant closure expenses(g)	Plant closure expenses(g)	478		756		1,149		1,298		Plant closure expenses(g)	2,627		266		3,776		1,564
Impairment of investment in unconsolidated affiliate(h)	Impairment of investment in unconsolidated affiliate(h)	9,613		—		9,613		—		Impairment of investment in unconsolidated affiliate(h)	—		—		9,613		—
Loss on extinguishment of debt(i)	Loss on extinguishment of debt(i)	—		—		—		14,312		Loss on extinguishment of debt(i)	—		6,365		—		20,677
Professional services relating to EO sterilization facilities(j)	Professional services relating to EO sterilization facilities(j)	17,678		10,644		35,737		24,043		Professional services relating to EO sterilization facilities(j)	14,501		9,449		50,238		33,492
Accretion of asset retirement obligation(k)	Accretion of asset retirement obligation(k)	598		602		1,118		1,153		Accretion of asset retirement obligation(k)	526		598		1,644		1,751
COVID-19 expenses(l)	COVID-19 expenses(l)	45		188		148		487		COVID-19 expenses(l)	6		109		154		596
Consolidated income before taxes	Consolidated income before taxes	$	48,108	$	61,797	$	93,375	$	75,879	Consolidated income before taxes	$	42,016	$	41,103	$	135,391	$	116,982

(a)The three and ~~six~~nine months ended ~~June~~September 30, 2022 excludes ~~$3.1~~$3.3 million ~~and $9.4 million, respectively,~~ of unrealized ~~gains~~loss and $6.1 million of unrealized gain, respectively, on interest rate derivatives not designated as hedging instruments.

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

(c)Represents non-cash share-based compensation expense.

(d)Represents the effects of (i) fluctuations in foreign currency exchange rates, (ii) non-cash mark-to-fair value of embedded derivatives relating to certain customer and supply contracts at Nordion and (iii) unrealized gains and losses on interest rate caps not designated as hedging instruments.

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(e)Represents (i) certain direct and incremental costs related to the acquisitions of RCA, the noncontrolling interests in our China subsidiaries, BioScience Labs in 2021, the first quarter 2021 gain on the mandatorily redeemable noncontrolling interest in Nelson Labs Fairfield (as described in Note 4, “Acquisitions”), and certain related integration efforts as a result of those acquisitions, (ii) the earnings impact of fair value adjustments (excluding those recognized within

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amortization expense) resulting from the businesses acquired, and (iii) transition services income and non-cash deferred lease income associated with the terms of the divestiture of the Medical Isotopes business in ~~2018.~~2018, and (iv) a $3.4 million gain recognized in the third quarter of 2021 related to the settlement of an insurance claim for Nordion that existed at the time of our acquisition of the business in 2014.

(f)Represents professional fees, contract termination and exit costs, severance and other payroll costs, and other costs associated with business optimization and cost savings projects relating to the integration of recent acquisitions, operating structure realignment and other process enhancement projects.

(g)Represents decommissioning costs, professional fees, severance and other payroll costs, and other costs including ongoing lease and utility expenses associated with the closure of the Willowbrook, Illinois facility.

(h)Represents an impairment charge on our equity method investment in ~~Auralux.~~a joint venture. Refer to Note 1, “Basis of Presentation”.

(i)Represents expenses incurred in connection with the repricing of our Term Loan in January 2021 and full redemption of the First Lien Notes in August 2021, including a prepayment premium and accelerated amortization of prior debt issuance and discount costs.

(j)Represents litigation and other professional fees associated with our EO sterilization facilities. See Note 16, “Commitments and Contingencies”.

(k)Represents non-cash accretion of asset retirement obligations related to ~~Co-60~~gamma and ~~gamma~~EO processing facilities, which are based on estimated site remediation costs for any future decommissioning of these facilities (without regard for whether the decommissioning services would be performed by employees of Nordion, instead of by a third party) and are accreted over the life of the asset.

(l)Represents non-recurring costs associated with the COVID-19 pandemic, including incremental costs to implement workplace health and safety measures.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2021 Form 10-K. This discussion and analysis contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of various factors, including the factors we describe in the section entitled Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q, as well as Part I, Item 1A, “Risk Factors” in our 2021 Form 10-K.

OVERVIEW

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

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

For the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, we recorded net revenues of ~~$266.6~~$248.7 million and ~~$503.4~~$752.1 million, net income of ~~$30.4~~$25.1 million and ~~$61.1~~$86.1 million, Adjusted Net Income of ~~$75.8~~$64.5 million and ~~$136.1~~$200.6 million, and Adjusted EBITDA of ~~$136.1~~$125.2 million and ~~$251.5~~$376.6 million. For the definition of Adjusted Net Income and Adjusted EBITDA and the reconciliation of these non-GAAP measures from net income, please see “Non-GAAP Financial Measures.”

STRATEGIC DEVELOPMENTS AND KEY FACTORS AFFECTING OUR RESULTS OF OPERATIONS

The following summarizes strategic developments and key factors that have impacted our operating results for the three and ~~six~~nine months ended ~~June~~September 30, 2022 and may continue to affect our performance and financial condition in future periods.

•Business and market conditions. During the three and ~~six~~nine months ended ~~June~~September 30, 2022, Sterigenics and Nordion continued to ~~benefit from a~~see sustained demand for sterilization services. ~~Although the decline in pandemic-related testing stabilized~~Nelson Labs’ net revenues increased in the ~~second~~third quarter of 2022 compared to the ~~competitive~~third quarter of 2021; however, slower than expected growth of certain laboratory testing categories combined with customer driven delays impacted Nelson Labs’ growth. Overall, we continue to face ongoing macroeconomic pressures, particularly related to inflation, including energy and labor ~~market, broad inflationary impacts, supply chain constraints and regulatory update delays remained an ongoing challenge for Nelson Labs.~~costs, as well as fluctuations in foreign currency exchange rates. As discussed in more detail in our most recent Form 10-K, a portion of our supply of Co-60 is generated by Russian nuclear reactors. We continue to monitor the potential for disruption in the supply of Co-60 from Russian nuclear ~~reactors; to date there has been~~reactors and we expect no material impact in 2022 on our supply or revenue.

•Investment initiatives. We ~~remain focused on our~~continue to make significant investments in capacity expansions and facility improvements as well as in our efforts to strengthen our Co-60 supply chain. For the ~~six~~nine months ended ~~June~~September 30, 2022, ~~we increased~~ capital expenditures increased by ~~$26.9~~$49.7 million compared to the ~~six~~nine months ended ~~June~~September 30, 2021.

•Disciplined and strategic M&A activity. We remain committed to our highly disciplined acquisition strategy and continue to seek suitable acquisition ~~targets in 2022.~~targets. On November 4, 2021, we acquired Regulatory Compliance Associates Inc. (“RCA”) headquartered in Pleasant Prairie, Wisconsin. RCA is an industry leader in providing life sciences consulting focused on quality, regulatory, and technical consulting for the pharmaceutical, medical device and combination device industries. RCA expands and strengthens the technical consulting and expert advisory capabilities of Nelson Labs. On March 8, 2021, we acquired BioScience Laboratories, LLC (“BioScience Labs”) based in Bozeman, Montana, bringing expertise in antimicrobial and virology testing to our Nelson Labs segment.

3133

•Litigation costs. In connection with ~~the~~ ongoing litigation related to our Willowbrook, Illinois, Atlanta, Georgia and Santa Teresa, New Mexico facilities, as described in Note 16, “Commitments and Contingencies”, we recorded costs of ~~$17.7~~$14.5 million and ~~$35.7~~$50.2 million for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively. Insurance coverage has been available for some of our ~~costs in this~~ ethylene oxide (“EO”) tort litigation ~~in the past and as~~claims. As of ~~June~~September 30, 2022 we have approximately ~~$4.0~~$2.5 million of such coverage remaining. Our insurance for future alleged environmental liabilities excludes coverage for EO claims. ~~See Note 16, “Commitments and Contingencies”.~~

In addition, we are pursuing other insurance coverage for our legal expenses related to the EO tort litigation. In 2021, Sterigenics U.S., LLC filed an insurance coverage lawsuit in the U.S. District Court for the Northern District of Illinois relating to two commercial general liability policies issued in the 1980s. On August 3, 2022, the Court issued a Memorandum Opinion and Order concluding that the insurance company owes Sterigenics U.S., LLC and another party a duty to defend the Willowbrook, Illinois litigation, which may allow us to recover defense costs related to that litigation.

On September 19, 2022 a jury rendered a verdict in favor of the plaintiff in the first EO tort litigation trial in Illinois. We intend to vigorously challenge the judgment through all appropriate post-trial motions and appeal processes. The payment of any damages in this matter is expected to be stayed pending resolution of the post-trial and appeals processes. Refer to Note 16, “Commitments and Contingencies”, and Part II Item 1A. Risk Factors in this report.

CONSOLIDATED RESULTS OF OPERATIONS

Three Months Ended ~~June~~September 30, 2022 as compared to Three Months Ended ~~June~~September 30, 2021

The following table sets forth the components of our results of operations for the three months ended ~~June~~September 30, 2022 and 2021.


(thousands of U.S. dollars)	(thousands of U.S. dollars)	2022		2021		$ Change		% Change		(thousands of U.S. dollars)	2022		2021		$ Change		% Change

Total net revenues	Total net revenues	$	266,639	$	251,917	$	14,722	5.8	%	Total net revenues	$	248,704	$	226,164	$	22,540	10.0	%
Total cost of revenues	Total cost of revenues	116,243		108,156		8,087		7.5	%	Total cost of revenues	112,691		100,578		12,113		12.0	%
Total operating expenses	Total operating expenses	78,901		65,489		13,412		20.5	%	Total operating expenses	72,818		59,915		12,903		21.5	%
Operating income	Operating income	71,495		78,272		(6,777)		(8.7)	%	Operating income	63,195		65,671		(2,476)		(3.8)	%
Net income	Net income	30,418		42,615		(12,197)		(28.6)	%	Net income	25,090		27,444		(2,354)		(8.6)	%
Adjusted Net Income(a)	Adjusted Net Income(a)	75,825		71,672		4,153		5.8	%	Adjusted Net Income(a)	64,508		58,704		5,804		9.9	%
Adjusted EBITDA(a)	Adjusted EBITDA(a)	136,135		134,563		1,572		1.2	%	Adjusted EBITDA(a)	125,152		116,674		8,478		7.3	%

(a)Adjusted Net Income and Adjusted EBITDA are non-GAAP financial measures. For more information regarding our calculation of Adjusted Net Income and Adjusted EBITDA, including information about their limitations as tools for analysis and a reconciliation of net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted Net Income and Adjusted EBITDA, please see the reconciliation included below in “Non-GAAP Financial Measures.”

Total Net Revenues

The following table compares our revenues by type for the three months ended ~~June~~September 30, 2022 to the three months ended ~~June~~September 30, 2021.


(thousands of U.S. dollars)	(thousands of U.S. dollars)									(thousands of U.S. dollars)
Net revenues for the three months ended June 30,		2022		2021		$ Change		% Change
Net revenues for the three months ended September 30,										Net revenues for the three months ended September 30,	2022		2021		$ Change		% Change

Service	Service	$	221,529	$	208,710	$	12,819	6.1	%	Service	$	216,704	$	200,499	$	16,205	8.1	%
Product	Product	45,110		43,207		1,903		4.4	%	Product	32,000		25,665		6,335		24.7	%
Total net revenues	Total net revenues	$	266,639	$	251,917	$	14,722	5.8	%	Total net revenues	$	248,704	$	226,164	$	22,540	10.0	%

Net revenues were ~~$266.6~~$248.7 million in the three months ended ~~June~~September 30, 2022, an increase of ~~$14.7~~$22.5 million, or ~~5.8%~~10.0%, as compared with the three months ended ~~June~~September 30, 2021. Excluding the impact of foreign currency exchange rates, net revenues in the three months ended ~~June~~September 30, 2022 increased approximately ~~8.5%~~13.2% compared with the three months ended ~~June~~September 30, 2021.

Service revenues

Service revenues increased ~~$12.8~~$16.2 million, or ~~6.1%~~8.1%, to ~~$221.5~~$216.7 million in the three months ended ~~June~~September 30, 2022 as compared to ~~$208.7~~$200.5 million in the three months ended ~~June~~September 30, 2021. The increase in net service revenue was driven by favorable pricing of ~~$8.9~~$8.8 million and ~~$3.1~~$3.3 million in the Sterigenics and Nelson Labs segments, respectively, and $8.3 million of sales volume growth ~~of $7.3 million~~ in the Sterigenics segment. ~~The RCA~~Our Nelson Labs recent acquisition ~~also~~ contributed ~~$3.3~~$3.0 million toof service revenue ~~growth. Partially offsetting these factors was an overall decline of $2.9 million in pandemic-related testing revenue in~~growth to the Nelson Labs segment.

Service revenue growth was ~~also~~partially offset by a ~~$5.3~~$6.5 million unfavorable impact from changes in foreign currency exchange rates across all segments.

Product revenues

Product revenues increased ~~$1.9~~$6.3 million, or ~~4.4%~~24.7%, to ~~$45.1~~$32.0 million in the three months ended ~~June~~September 30, 2022 as compared to ~~$43.2~~$25.7 million in the three months ended ~~June~~September 30, 2021. The increase in product revenues was attributable to volume growth of $5.1 million and favorable pricing of ~~$3.0~~$2.0 million, partially offset by a ~~$1.3~~$0.8 million unfavorable impact from changes in foreign currency exchange rates.

Total Cost of Revenues

The following table compares our cost of revenues by type for the three months ended ~~June~~September 30, 2022 to the three months ended ~~June~~September 30, 2021.


(thousands of U.S. dollars)	(thousands of U.S. dollars)									(thousands of U.S. dollars)
Cost of revenues for the three months ended June 30,		2022		2021		$ Change		% Change
Cost of revenues for the three months ended September 30,										Cost of revenues for the three months ended September 30,	2022		2021		$ Change		% Change

Service	Service	$	98,407	$	91,391	$	7,016	7.7	%	Service	$	99,772	$	88,349	$	11,423	12.9	%
Product	Product	17,836		16,765		1,071		6.4	%	Product	12,919		12,229		690		5.6	%
Total cost of revenues	Total cost of revenues	$	116,243	$	108,156	$	8,087	7.5	%	Total cost of revenues	$	112,691	$	100,578	$	12,113	12.0	%

Total cost of revenues accounted for approximately ~~43.6%~~45.3% and ~~42.9%~~44.5% of our consolidated net revenues for the three months ended ~~June~~September 30, 2022 and ~~2020,~~2021, respectively.

Cost of service revenues

Cost of service revenues increased ~~$7.0~~$11.4 million, or ~~7.7%~~12.9%, for the three months ended ~~June~~September 30, 2022 as compared to the three months ended ~~June~~September 30, 2021. The increase was ~~attributable to $6.5 million of~~correlated with the expansion in sales volumes growth, predominately in the Sterigenics segment, as well as increased costs arising from inflationary pressures, ~~mainly~~which were most notable on labor and energy costs. Our Nelson Labs recent acquisition accounted for $2.2 million of the ~~cost~~increase. Additionally, increased staffing in anticipation of ~~energy. Cost of sales was also impacted by an~~ incremental ~~contribution of $2.3 million from the RCA acquisition~~volume in the Nelson Labs ~~segment.~~segment contributed to the increase in cost of service revenues. Partially offsetting the ~~total~~ increase was a ~~$2.7~~$3.4 million impact from changes in foreign currency exchange rates.

Cost of product revenues

Cost of product revenues increased ~~$1.1~~$0.7 million, or ~~6.4%~~5.6%, for the three months ended ~~June~~September 30, 2022 as compared to the three months ended ~~June~~September 30, 2021. The increase principally reflects incremental costs due to product mix, offset by impacts from changes in foreign currency ~~exchange~~exchanges rates.

Operating Expenses

The following table compares our operating expenses for the three months ended ~~June~~September 30, 2022 to the three months ended ~~June~~September 30, 2021:


(thousands of U.S. dollars)	(thousands of U.S. dollars)									(thousands of U.S. dollars)
Operating expenses for the three months ended June 30,		2022		2021		$ Change		% Change
Operating expenses for the three months ended September 30,										Operating expenses for the three months ended September 30,	2022		2021		$ Change		% Change

Selling, general and administrative expenses	Selling, general and administrative expenses	$	63,132	$	49,828	$	13,304	26.7	%	Selling, general and administrative expenses	$	57,091	$	44,038	$	13,053	29.6	%
Amortization of intangible assets	Amortization of intangible assets	15,769		15,661		108		0.7	%	Amortization of intangible assets	15,727		15,877		(150)		(0.9)	%

Total operating expenses	Total operating expenses	$	78,901	$	65,489	$	13,412	20.5	%	Total operating expenses	$	72,818	$	59,915	$	12,903	21.5	%

Operating expenses accounted for approximately ~~29.6%~~29.3% and ~~26.0%~~26.5% of our consolidated net revenues for the three months ended ~~June~~September 30, 2022 and 2021, respectively.

SG&A

SG&A increased ~~$13.3~~$13.1 million, or ~~26.7%~~29.6%, for the three months ended ~~June~~September 30, 2022 as compared to the three months ended ~~June~~September 30, 2021. The increase was largely driven ~~primarily~~ by the ~~following factors:~~following:

•$~~7.0~~5.1 million increase in litigation and other professional services expense associated with EO sterilization facilities;

•

$2.5 million increase in selling and administrative personnel in support of the growth and enhancement of our business; and

•$~~2.3~~1.1 million increase in share-based compensation expense related to our 2020 Omnibus Incentive ~~Plan; and~~Plan.

•~~$2.6~~In addition, in the three months ended September 30, 2021, we recorded a $3.4 million ~~increase~~favorable settlement related to an insurance claim for Nordion which did not recur in ~~selling and administrative personnel and post-COVID-19 travel costs in support of our general business growth.~~2022.

Amortization of intangible assets

Amortization of intangible assets was ~~$15.8~~$15.7 million for the three months ended ~~June~~September 30, 2022, ~~or 0.7% above~~representing a decrease of 0.9% from the three months ended ~~June~~September 30, 2021. The ~~increase~~change was due mainly to a reduction in amortization expense related to certain intangible assets that were fully amortized by December 31, 2021 combined with changes in foreign currency exchange ~~rates.~~rates, partially offset by additional amortization expense for intangible assets acquired in connection with the RCA acquisition.

Interest Expense, Net

Interest expense, net ~~decreased $5.1~~increased $5.3 million, or ~~26.7%~~29.1%, for the three months ended ~~June~~September 30, 2022 as compared to the three months ended ~~June~~September 30, 2021. ~~The decrease was primarily driven by a $4.4~~Interest expense increased $6.4 million ~~reduction to interest expense~~ attributable to ~~the favorable change in fair value and quarterly settlement of~~a higher weighted average interest rate derivatives not designated as hedging instruments. The decrease was also driven by a decline in interest expense on outstanding borrowings of $0.9 million, due largely to a lower average outstanding debt balance for the three months ended ~~June~~September 30, 2022 as compared to the three months ended ~~June~~September 30, 2021. The weighted average interest rate on our outstanding debt was ~~3.81%~~5.87% and ~~3.45%~~3.25% at ~~June~~September 30, 2022 and 2021, respectively.

~~Impairment~~ The increase was partially offset by the change in fair value and quarterly settlement of ~~Investment~~interest rate caps not designated as hedging instruments which totaled $1.1 million in ~~Unconsolidated Affiliate~~

~~During~~ the ~~three months ended June 30, 2022, we recorded an impairment charge~~third quarter of $9.6 million related to a joint venture investment in Auralux Enterprises Ltd. (“Auralux”) which was acquired as part of the 2020 Iotron acquisition. Due to a shift in business strategy, the joint venture will not proceed, and our joint venture partner will continue to rely on our other existing operating facilities. Based on these facts and circumstances, we concluded that the investment was impaired as of June 30, 2022.

Foreign Exchange (Gain) Loss ~~(Gain)~~

Foreign exchange gain was ~~$0.8~~$0.5 million for the three months ended ~~June~~September 30, 2022 as compared to a loss of ~~$0.1~~$0.8 million in the three months ended ~~June~~September 30, 2021. The change in foreign exchange (gain) loss ~~(gain)~~ in our Consolidated Statements of Operations and Comprehensive Income (Loss) mainly relates to short-term losses (offset by short-term gains) on sales denominated in currencies other than the functional currency of our operating entities. As described in Note 17, “Financial Instruments and Financial Risk” we enter into monthly U.S. dollar-denominated foreign currency forward contracts to manage foreign currency exchange rate risk of our intercompany loans in certain of our international subsidiaries.

Other ~~Expense (Income),~~Income, Net

Other ~~expense (income),~~income, net was ~~$0.5~~$1.7 million for the three months ended ~~June~~September 30, 2022 compared to ~~$(2.8)~~$0.7 million for the three months ended ~~June~~September 30, 2021. The fluctuation was mainly driven by ~~unfavorable~~ changes in the fair value of ~~Nordion’s~~the embedded derivatives in Nordion’s contracts. We recorded an unrealized loss on embedded derivatives of $0.4 million for the three months ended ~~June~~September 30, ~~2022.~~2022 as compared to $1.2 million for the three months ended September 30, 2021.

Provision for Income Taxes

Provision for income tax ~~decreased $1.5~~increased $3.3 million to a net provision of ~~$17.7~~$16.9 million for the three months ended ~~June~~September 30, 2022 as compared to ~~$19.2~~$13.7 million in the three months ended ~~June~~September 30, 2021. The change was ~~primarily~~partially attributable to ~~lower~~ pre-tax income of $42.0 million in the three months ended September 30, 2022 compared to pretax income of $41.1 million for the three months ended ~~June~~September 30, ~~2022 compared~~2021 and an increase in the valuation allowance related to the limitation on the deductibility of interest expense and the impairment of an investment in a joint venture. In addition, income tax expense for the three months ended ~~June~~September 30, ~~2021.~~2021 was lower due to a discrete item that reversed the valuation allowance on deferred tax assets related to certain asset retirement obligations.

Provision for income taxes for the three months ended ~~June 30, 2022 and the three months ended June~~September 30, 2022 differed from the statutory rate primarily due to an increase in the valuation allowance, the impact of the foreign rate differential, and income tax on ~~Global Intangible Low Taxed Income~~global intangible low-tax income (“GILTI”). ~~The~~Provision for income taxes for the three months ended September 30, 2021 differed from the statutory rate

primarily due to the foreign rate differential, GILTI, and a net increase in the valuation allowance ~~was~~ attributable to the limitation on the deductibility of interest expense and the impairment of the investment in Auralux. Provision for income taxes for the three months ended June 30, 2021 was partially offset by a discrete item, which reversed the valuation allowance on deferred tax assets related to certain asset retirement obligations.expense.

Net Income, Adjusted Net Income and Adjusted EBITDA

Net income for the three months ended ~~June~~September 30, 2022 was ~~$30.4~~$25.1 million, as compared to net income of ~~$42.6~~$27.4 million for the three months ended ~~June~~September 30, 2021. Adjusted Net Income was ~~$75.8~~$64.5 million for the three months ended ~~June~~September 30, 2022, as compared to ~~$71.7~~$58.7 million for the three months ended ~~June~~September 30, 2021, due to the factors described above. Adjusted EBITDA was ~~$136.1~~$125.2 million for the three months ended ~~June~~September 30, 2022, as compared to ~~$134.6~~$116.7 million for the three months ended ~~June~~September 30, 2021, 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.

~~Six~~Nine Months Ended ~~June~~September 30, 2022 as compared to ~~Six~~Nine Months Ended ~~June~~September 30, 2021

The following table sets forth the components of our results of operations for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021.


(thousands of U.S. dollars)	(thousands of U.S. dollars)	2022		2021		$ Change		% Change		(thousands of U.S. dollars)	2022		2021		$ Change		% Change

Total net revenues	Total net revenues	$	503,393	$	464,065	$	39,328	8.5	%	Total net revenues	$	752,097	$	690,229	$	61,868	9.0	%
Total cost of revenues	Total cost of revenues	224,122		204,932		19,190		9.4	%	Total cost of revenues	336,813		305,510		31,303		10.2	%
Total operating expenses	Total operating expenses	154,284		134,497		19,787		14.7	%	Total operating expenses	227,102		194,412		32,690		16.8	%
Operating income	Operating income	124,987		124,636		351		0.3	%	Operating income	188,182		190,307		(2,125)		(1.1)	%
Net income	Net income	61,059		53,680		7,379		13.7	%	Net income	86,149		81,124		5,025		6.2	%
Adjusted Net Income(a)	Adjusted Net Income(a)	136,079		123,178		12,901		10.5	%	Adjusted Net Income(a)	200,587		181,882		18,705		10.3	%
Adjusted EBITDA(a)	Adjusted EBITDA(a)	251,484		239,880		11,604		4.8	%	Adjusted EBITDA(a)	376,636		356,554		20,082		5.6	%

Total Net Revenues

The following table compares our revenues by type for the ~~six~~nine months ended ~~June~~September 30, 2022 to the ~~six~~nine months ended ~~June~~September 30, 2021.


(thousands of U.S. dollars)	(thousands of U.S. dollars)									(thousands of U.S. dollars)
Net revenues for the six months ended June 30,		2022		2021		$ Change		% Change
Net revenues for the nine months ended September 30,										Net revenues for the nine months ended September 30,	2022		2021		$ Change		% Change

Service	Service	$	427,747	$	397,408	$	30,339	7.6	%	Service	$	644,451	$	597,907	$	46,544	7.8	%
Product	Product	75,646		66,657		8,989		13.5	%	Product	107,646		92,322		15,324		16.6	%
Total net revenues	Total net revenues	$	503,393	$	464,065	$	39,328	8.5	%	Total net revenues	$	752,097	$	690,229	$	61,868	9.0	%

Net revenues were ~~$503.4~~$752.1 million in the ~~six~~nine months ended ~~June~~September 30, 2022, an increase of ~~$39.3~~$61.9 million, or ~~8.5%~~9.0%, as compared with the ~~six~~nine months ended ~~June~~September 30, 2021. Excluding the impact of foreign currency exchange rates, net revenues in the ~~six~~nine months ended ~~June~~September 30, 2022 increased approximately ~~10.4%~~11.3% compared with the ~~six~~nine months ended ~~June~~September 30, 2021.

Service revenues

Service revenues increased ~~$30.3~~$46.5 million, or ~~7.6%~~7.8%, to ~~$427.7~~$644.5 million in the ~~six~~nine months ended ~~June~~September 30, 2022 as compared to ~~$397.4~~$597.9 million in the ~~six~~nine months ended ~~June~~September 30, 2021. The ~~increase~~growth in net service ~~revenue~~revenues was driven by sales volume growth of ~~$20.2~~$28.5 million in the Sterigenics segment and ~~$15.9~~favorable pricing of $24.7 million and ~~$5.4~~$8.8 million ~~from favorable pricing~~ in the Sterigenics and Nelson Labs segments, respectively. ~~The BioScience~~Our recent Nelson Labs ~~and RCA~~ acquisitions ~~also~~ contributed ~~$8.0~~$11.0 million to service ~~revenue growth.~~revenue. Partially offsetting these factors was an overall decline of ~~$8.8~~$10.8 million in pandemic-related testing revenue as well as

a decrease in volumes in other testing categories in the Nelson Labs segment. Service revenue growth was offset by a ~~$7.7~~$14.3 million unfavorable impact from changes in foreign currency exchange rates across all segments.

Product revenues

Product revenues increased ~~$9.0~~$15.3 million, or ~~13.5%~~16.6%, to ~~$75.6~~$107.6 million in the ~~six~~nine months ended ~~June~~September 30, 2022 as compared to ~~$66.7~~$92.3 million in the ~~six~~nine months ended ~~June~~September 30, 2021. The expansion in product revenues was attributable to ~~$5.6 million of growth in~~ sales volume growth of $10.5 million coupled with ~~$4.8~~$6.8 million from favorable pricing in our Nordion segment. Partially offsetting this increase was a ~~$1.3~~$2.0 million unfavorable impact from changes in foreign currency exchange rates.

Total Cost of Revenues

The following table compares our cost of revenues by type for the ~~six~~nine months ended ~~June~~September 30, 2022 to the ~~six~~nine months ended ~~June~~September 30, 2021.


(thousands of U.S. dollars)	(thousands of U.S. dollars)									(thousands of U.S. dollars)
Cost of revenues for the six months ended June 30,		2022		2021		$ Change		% Change
Cost of revenues for the nine months ended September 30,										Cost of revenues for the nine months ended September 30,	2022		2021		$ Change		% Change

Service	Service	$	192,983	$	176,427	$	16,556	9.4	%	Service	$	292,755	$	264,776	$	27,979	10.6	%
Product	Product	31,139		28,505		2,634		9.2	%	Product	44,058		40,734		3,324		8.2	%
Total cost of revenues	Total cost of revenues	$	224,122	$	204,932	$	19,190	9.4	%	Total cost of revenues	$	336,813	$	305,510	$	31,303	10.2	%

Total cost of revenues accounted for approximately ~~44.5%~~44.8% and ~~44.2%~~44.3% of our consolidated net revenues for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, respectively.

Cost of service revenues

Cost of service revenues increased ~~$16.6~~$28.0 million, or ~~9.4%~~10.6%, for the ~~six~~nine months ended ~~June~~September 30, 2022 as compared to the ~~six~~nine months ended ~~June~~September 30, 2021. The increase was attributable to approximately ~~$14.0~~$21.7 million of increased costs arising from the expansion in sales volumes growth, predominately in the Sterigenics segment, as well as inflationary pressures, ~~mainly~~most notably on labor and ~~the cost of energy.~~energy costs. Cost of ~~sales~~service revenues was also impacted by an incremental ~~contribution~~costs of ~~$5.9~~$8.1 million from ~~the RCA~~our recent Nelson Labs acquisitions and ~~BioScience Labs acquisitions~~increased staffing in anticipation of incremental volume in the Nelson Labs segment. Partially offsetting this increase was a ~~$3.9~~$6.9 million impact from changes in foreign currency exchange rates.

Cost of product revenues

Cost of product revenues increased ~~$2.6~~$3.3 million, or ~~9.2%~~8.2%, for the ~~six~~nine months ended ~~June~~September 30, 2022 as compared to the ~~six~~nine months ended ~~June~~September 30, 2021. The increase reflects incremental costs due to product mix, partially offset by ~~impacts~~a favorable impact from changes in foreign currency exchanges rates.

Operating Expenses

The following table compares our operating expenses for the ~~six~~nine months ended ~~June~~September 30, 2022 to the ~~six~~nine months ended ~~June~~September 30, 2021:


(thousands of U.S. dollars)	(thousands of U.S. dollars)									(thousands of U.S. dollars)
Operating expenses for the six months ended June 30,		2022		2021		$ Change		% Change
Operating expenses for the nine months ended September 30,										Operating expenses for the nine months ended September 30,	2022		2021		$ Change		% Change

Selling, general and administrative expenses	Selling, general and administrative expenses	$	122,674	$	102,293	$	20,381	19.9	%	Selling, general and administrative expenses	$	179,765	$	146,331	$	33,434	22.8	%
Amortization of intangible assets	Amortization of intangible assets	31,610		32,204		(594)		(1.8)	%	Amortization of intangible assets	47,337		48,081		(744)		(1.5)	%

Total operating expenses	Total operating expenses	$	154,284	$	134,497	$	19,787	14.7	%	Total operating expenses	$	227,102	$	194,412	$	32,690	16.8	%

Operating expenses accounted for approximately ~~30.6%~~30.2% and ~~29.0%~~28.2% of our consolidated net revenues for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, respectively.

SG&A

SG&A increased ~~$20.4~~$33.4 million, or ~~19.9%~~22.8%, for the ~~six~~nine months ended ~~June~~September 30, 2022 as compared to the ~~six~~nine months ended ~~June~~September 30, 2021. The increase was driven primarily by the ~~following factors:~~following:

•$~~11.7~~16.7 million increase in litigation and other professional services expense associated with EO sterilization facilities;

•$~~5.2~~6.5 million increase in selling and administrative personnel ~~and post-COVID-19 travel costs~~ in support of the growth and enhancement of our ~~general business growth;~~business; and

•$~~3.4~~4.5 million increase in share-based compensation expense related to our 2020 Omnibus Incentive Plan.

In addition, during the nine months ended September 30, 2021, we recorded a $3.4 million favorable settlement related to an insurance claim for Nordion, which did not recur in 2022.

Amortization of intangible assets

Amortization of intangible assets was ~~$31.6~~$47.3 million for the ~~six~~nine months ended ~~June~~September 30, 2022, or ~~1.8%~~1.5% below the ~~six~~nine months ended ~~June~~September 30, 2021. The change was due mainly to a reduction in amortization expense related to certain intangible assets that were fully amortized by December 31, 2021 ~~offset by~~combined with changes in foreign currency exchange ~~rates.~~

rates, partially offset by additional amortization expense for intangible assets acquired in connection with the RCA acquisition.

Interest Expense, Net

Interest expense, net decreased ~~$16.0~~$10.7 million, or ~~39.6%~~18.3%, for the ~~six~~nine months ended ~~June~~September 30, 2022 as compared to the ~~six~~nine months ended ~~June~~September 30, 2021. The decrease was driven by ~~a $10.7~~an $11.9 million reduction to interest expense attributable to the favorable change in fair value and quarterly settlement of interest rate caps not designated as hedging instruments. ~~The decrease~~Offsetting this decline was ~~also driven by~~ a ~~decline~~$1.1 million net increase in interest expense on our outstanding borrowings ~~of $5.3 million,~~ due ~~largely~~ to ~~a lower average outstanding debt balance~~the steady rise in the LIBOR benchmark interest rate for the ~~six~~nine months ended ~~June~~September 30, ~~2022 compared to the six months ended June 30, 2021 and a lower interest rate on our Term Loan following the January 20, 2021 repricing amendment.~~2022. The weighted average interest rate on our outstanding debt was ~~3.81%~~5.87% and ~~3.45%~~3.25% at ~~June~~September 30, 2022 and 2021, respectively.

Impairment of Investment in Unconsolidated Affiliate

During the ~~six~~nine months ended ~~June~~September 30, 2022, we recorded an impairment charge of $9.6 million related to a joint venture investment, ~~in Auralux,~~ which was acquired as part of the 2020 Iotron acquisition. Due to a shift in business strategy, the joint venture will not proceed, and our joint venture partner will continue to rely on our other existing operating facilities. Based on these facts and circumstances, we concluded that the investment was impaired as of June 30, 2022.

Foreign Exchange (Gain) Loss ~~(Gain)~~

Foreign exchange ~~loss~~gain was ~~$0.03~~$0.5 million for the ~~six~~nine months ended ~~June~~September 30, 2022 as compared to a loss of ~~$0.7~~$1.4 million in the ~~six~~nine months ended ~~June~~September 30, 2021. The change in foreign exchange (gain) loss in our Consolidated Statements of Operations and Comprehensive Income (Loss) mainly relates to short-term losses (offset by short-term gains) on sales denominated in currencies other than the functional currency of our operating entities. As described in Note 17, “Financial Instruments and Financial Risk” we enter into monthly U.S. dollar-denominated foreign currency forward contracts to manage foreign currency exchange rate risk of our intercompany loans in certain of our international subsidiaries.

Other ~~Expense (Income),~~Income, Net

Other ~~expense (income),~~income, net ~~was $(2.5)~~decreased $3.2 million, or 42.9%, for the ~~six~~nine months ended ~~June~~September 30, 2022 compared to ~~$(6.7) million for~~ the ~~six~~nine months ended ~~June~~September 30, 2021. The fluctuation was mainly driven by ~~changes~~an unfavorable change in the fair value of the embedded derivatives in Nordion’s ~~sales and~~ purchase contracts. ~~In addition,~~We recorded an unrealized loss on embedded derivatives of $1.8 million for the ~~six~~nine months ended ~~June~~September 30, ~~2021,~~2022 compared to a $0.4 million gain for the nine months ended September 30, 2021. In addition, we recorded $1.2 million of other income related to the gain on our purchase of the 15% mandatorily redeemable noncontrolling interest of Nelson Labs Fairfield in the second quarter of 2021 as compared to the amount previously accrued.

Provision for Income Taxes

Provision for income tax increased ~~$10.1~~$13.4 million to a net provision of ~~$32.3~~$49.2 million for the ~~six~~nine months ended ~~June~~September 30, 2022 as compared to ~~a $22.2~~$35.9 million infor the ~~six~~nine months ended ~~June~~September 30, 2021. The change was ~~principally~~ attributable to pre-tax income of ~~$93.4~~$135.4 million in the ~~six~~nine months ended ~~June~~September 30, 2022 compared to pretax income of ~~$75.9~~$117.0 million for the ~~six~~nine months ended ~~June 30, 2021. In addition, income tax expense for the six months ended June~~September 30, 2021 ~~was lower due to a discrete item that reversed~~and an increase in the valuation allowance ~~on deferred tax assets~~ related to ~~certain asset retirement obligations.~~the limitation on the deductibility of interest expense and the impairment of an investment in a joint venture.

Provision for income taxes for the ~~six~~nine months ended ~~June~~September 30, 2022 ~~and for the six months ended June 30, 2021~~ differed from the statutory rate primarily due to ana net increase in the valuation allowance, the impact of the foreign rate differential and GILTI. Income tax ~~on GILTI. The~~expense for the nine months ended September 30, 2021 differed from the statutory rate primarily due to the impact of the foreign rate differential, GILTI, a net increase in the interest expense valuation allowance, ~~was attributable~~and a discrete item pertaining to an income tax rate change in the ~~limitation on the deductibility of interest expense and the impairment of the investment in Auralux. Provision for income taxes for the six months ended June 30, 2021~~United Kingdom. This was partially offset by a discrete item ~~which~~that reversed the valuation allowance on deferred tax assets related to certain asset retirement obligations.

Net Income, Adjusted Net Income and Adjusted EBITDA

Net income for the ~~six~~nine months ended ~~June~~September 30, 2022 was ~~$61.1~~$86.1 million, as compared to net income of ~~$53.7~~$81.1 million for the ~~six~~nine months ended ~~June~~September 30, 2021. Adjusted Net Income was ~~$136.1~~$200.6 million for the ~~six~~nine months ended ~~June~~September 30, 2022, as compared to ~~$123.2~~$181.9 million for the ~~six~~nine months ended ~~June~~September 30, 2021, due to the factors described above. Adjusted EBITDA was ~~$251.5~~$376.6 million for the ~~six~~nine months ended ~~June~~September 30, 2022, as compared to ~~$239.9~~$356.6 million for the ~~six~~nine months ended ~~June~~September 30, 2021, 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 U.S. Generally Accepted Accounting Principles (“GAAP”), we consider Adjusted Net Income and Adjusted EBITDA, financial measures that are not based on any standardized methodology prescribed by GAAP.

We define Adjusted Net Income as net income before amortization and certain other adjustments that we do not consider in our evaluation of our ongoing operating performance from period to period as discussed further below. We define Adjusted EBITDA as Adjusted Net Income before interest expense, depreciation (including depreciation of Co-60 used in our operations) and income tax provision applicable to Adjusted Net Income.

We use Adjusted Net Income and Adjusted EBITDA, non-GAAP financial measures, as the principal measures of our operating performance. Management believes Adjusted Net Income and Adjusted EBITDA are useful because they allow management to more effectively evaluate our operating performance and compare the results of our operations from period to period without the impact of certain non-cash items and non-routine items that we do not expect to continue at the same level in the future and other items that are not core to our operations. We believe that these measures are useful to our investors because they provide a more complete understanding of the factors and trends affecting our business than could be obtained absent this disclosure. In addition, we believe Adjusted Net Income and Adjusted EBITDA will assist investors in making comparisons to our historical operating results and analyzing the underlying performance of our operations for the periods presented. Our management also uses Adjusted Net Income and Adjusted EBITDA in their financial analysis and operational decision-making, and Adjusted EBITDA serves as the basis for the metric we utilize to determine attainment of our primary annual incentive program. Adjusted Net Income and Adjusted EBITDA may be calculated differently from, and therefore may not be comparable to, a similarly titled measure used by other companies.

Adjusted Net Income and Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. There are a number of limitations related to the use of Adjusted Net Income and Adjusted EBITDA rather than net income, the nearest GAAP equivalent. For example, Adjusted Net Income and Adjusted EBITDA exclude:

•certain recurring non-cash charges such as depreciation of fixed assets, although these assets may have to be replaced in the future, as well as amortization of acquired intangible assets and asset retirement obligations;

•costs of acquiring and integrating businesses, which will continue to be a part of our growth strategy;

•non-cash gains or losses from fluctuations in foreign currency exchange rates, and the mark-to-fair value of derivatives not designated as hedging instruments, which includes the embedded derivatives relating to certain customer and supply contracts at Nordion;

•impairment charges on long-lived assets, intangible assets and investments accounted for under the equity method;

•loss on extinguishment of debt incurred in connection with refinancing or early extinguishment of long-term debt;

•expenses and charges related to the litigation and other activities associated with our EO sterilization facilities, including those related to Willowbrook, Illinois, Atlanta, Georgia and Santa Teresa, New Mexico, even though that litigation remains ongoing;

•in the case of Adjusted EBITDA, interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness; and

•share-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense and an important part of our compensation strategy.

In evaluating Adjusted Net Income and Adjusted EBITDA, you should be aware that in the future, we will incur expenses similar to the adjustments in the table below. Our presentations of Adjusted Net Income and Adjusted EBITDA should not be construed as suggesting that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider Adjusted Net Income and Adjusted EBITDA alongside other financial performance measures, including our net income and other GAAP measures.

The following table presents a reconciliation of net income, the most directly comparable financial measure calculated and presented in accordance with GAAP to Adjusted Net Income and Adjusted EBITDA, for each of the periods indicated:


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
(thousands of U.S. dollars)	(thousands of U.S. dollars)	2022		2021		2022		2021		(thousands of U.S. dollars)	2022		2021		2022		2021
Net income	Net income	$	30,418	$	42,615	$	61,059	$	53,680	Net income	$	25,090	$	27,444	$	86,149	$	81,124
Amortization of intangibles	Amortization of intangibles	21,195		21,778		41,377		44,060		Amortization of intangibles	20,219		21,239		61,596		65,299
Share-based compensation(a)	Share-based compensation(a)	5,801		3,493		10,339		6,942		Share-based compensation(a)	4,616		3,547		14,955		10,489

Gain on foreign currency and derivatives not designated as hedging instruments(b)		(1,430)		(660)		(7,982)		(996)
(Gain) loss on foreign currency and embedded derivatives(b)										(Gain) loss on foreign currency and embedded derivatives(b)	3,194		1,881		(4,788)		885
Acquisition and divestiture related charges, net(c)	Acquisition and divestiture related charges, net(c)	691		844		531		659		Acquisition and divestiture related charges, net(c)	447		(2,662)		978		(2,003)
Business optimization project expenses(d)	Business optimization project expenses(d)	470		275		574		536		Business optimization project expenses(d)	1,035		244		1,609		780
Plant closure expenses(e)	Plant closure expenses(e)	478		756		1,149		1,298		Plant closure expenses(e)	2,627		266		3,776		1,564
Impairment of investment in unconsolidated affiliate(f)	Impairment of investment in unconsolidated affiliate(f)	9,613		—		9,613		—		Impairment of investment in unconsolidated affiliate(f)	—		—		9,613		—
Loss on extinguishment of debt(g)	Loss on extinguishment of debt(g)	—		—		—		14,312		Loss on extinguishment of debt(g)	—		6,365		—		20,677
Professional services relating to EO sterilization facilities(h)	Professional services relating to EO sterilization facilities(h)	17,678		10,644		35,737		24,043		Professional services relating to EO sterilization facilities(h)	14,501		9,449		50,238		33,492
Accretion of asset retirement obligations(i)	Accretion of asset retirement obligations(i)	598		602		1,118		1,153		Accretion of asset retirement obligations(i)	526		598		1,644		1,751
COVID-19 expenses(j)	COVID-19 expenses(j)	45		188		148		487		COVID-19 expenses(j)	6		109		154		596
Income tax benefit associated with pre-tax adjustments(k)	Income tax benefit associated with pre-tax adjustments(k)	(9,732)		(8,863)		(17,584)		(22,996)		Income tax benefit associated with pre-tax adjustments(k)	(7,753)		(9,776)		(25,337)		(32,772)
Adjusted Net Income	Adjusted Net Income	75,825		71,672		136,079		123,178		Adjusted Net Income	64,508		58,704		200,587		181,882
Interest expense, net(l)	Interest expense, net(l)	17,144		19,163		33,894		40,445		Interest expense, net(l)	20,080		18,140		53,974		58,585
Depreciation(m)	Depreciation(m)	15,744		15,683		31,611		31,062		Depreciation(m)	15,885		16,395		47,496		47,457
Income tax provision applicable to Adjusted Net Income(n)	Income tax provision applicable to Adjusted Net Income(n)	27,422		28,045		49,900		45,195		Income tax provision applicable to Adjusted Net Income(n)	24,679		23,435		74,579		68,630
Adjusted EBITDA(o)	Adjusted EBITDA(o)	$	136,135	$	134,563	$	251,484	$	239,880	Adjusted EBITDA(o)	$	125,152	$	116,674	$	376,636	$	356,554

(a) Represents non-cash share-based compensation expense.

(b) Represents the effects of (i) fluctuations in foreign currency exchange rates, (ii) non-cash mark-to-fair value of embedded derivatives relating to certain customer and supply contracts at Nordion and (iii) unrealized gains and losses on interest rate caps not designated as hedging instruments.

(c) Represents (i) certain direct and incremental costs related to the acquisitions of RCA, the noncontrolling interests in our China subsidiaries, BioScience Labs in 2021, the first quarter 2021 gain on the mandatorily redeemable noncontrolling interest in Nelson Labs Fairfield (as described in Note 4, “Acquisitions”), and certain related integration efforts as a result of those acquisitions, (ii) the earnings impact of fair value adjustments (excluding those recognized within amortization expense) resulting from the businesses acquired, and (iii) transition services income and non-cash deferred lease income associated with the terms of the divestiture of the Medical Isotopes business in ~~2018.~~2018, and (iv) a $3.4 million gain recognized in the third quarter of 2021 related to the settlement of an insurance claim for Nordion that existed at the time of our acquisition of the business in 2014.

(d) Represents professional fees, contract termination and exit costs, severance and other payroll costs, and other costs associated with business optimization and cost savings projects relating to the integration of recent acquisitions, operating structure realignment and other process enhancement projects.

(e) Represents decommissioning costs, professional fees, severance and other payroll costs, and other costs including ongoing lease and utility expenses associated with the closure of the Willowbrook, Illinois facility.

(f) Represents an impairment charge on our equity method investment in ~~Auralux.~~a joint venture. Refer to Note 1, “Basis of Presentation”.

(g) Represents expenses incurred in connection with the repricing of our Term Loan in January 2021 and full redemption of the First Lien Notes in August 2021, including a prepayment premium and accelerated amortization of prior debt issuance and discount costs.

(h) Represents litigation and other professional fees associated with our EO sterilization facilities. See Note 16, “Commitments and Contingencies”.

(i) Represents non-cash accretion of asset retirement obligations related to ~~Co-60~~gamma and ~~gamma~~EO processing facilities, which are based on estimated site remediation costs for any future decommissioning of these facilities (without regard for whether the decommissioning services would be performed by employees of Nordion, instead of by a third party) and are accreted over the life of the asset.

(j) Represents non-recurring costs associated with the COVID-19 pandemic, including incremental costs to implement workplace health and safety measures.

(k) 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.

(l) The three and ~~six~~nine months ended ~~June~~September 30, 2022 excludes ~~$3.1~~$3.3 million ~~and $9.4 million, respectively,~~ of unrealized ~~gains~~loss and $6.1 million of unrealized gain, respectively, on interest rate derivatives not designated as hedging instruments.

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

(

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

(o) ~~$20.9~~$22.1 million and ~~$21.8~~$20.8 million of the adjustments for the three months ended ~~June~~September 30, 2022 and 2021, respectively, and ~~$40.7~~$62.8 million and ~~$42.5~~$63.3 million of the adjustments for the ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, respectively, are included in cost of revenues, primarily consisting of amortization of ~~intangibles,~~intangible assets, depreciation, and accretion of asset retirement obligations.

SEGMENT RESULTS OF OPERATIONS

We have three reportable segments: Sterigenics, Nordion and Nelson Labs. Our chief operating decision maker evaluates performance and allocates resources within our business based on Segment Income, which excludes certain items which are included in income before tax as determined in our Consolidated Statements of Operations and Comprehensive Income (Loss). The accounting policies for our reportable segments are the same as those for the consolidated Company.

Our Segments

Sterigenics

Nordion

As a result of the time required to meet regulatory and logistics requirements for delivery of radioactive products, combined with accommodations made to our customers to minimize disruptions to their operations during the installation of Co-60, Nordion sales patterns can often vary significantly from one quarter to the next. However, timing-related impacts on our sales performance tend to be resolved within several quarters, resulting in more consistent performance over longer periods of time. In addition, sales of gamma irradiation systems occur infrequently and tend to be for larger amounts.

Results for our Nordion segment are also impacted by Co-60 supplier mix, harvest schedules and product and service mix.

Nelson Labs

Nelson Labs provides outsourced microbiological and analytical chemistry testing and advisory services for the medical device and pharmaceutical industries.

For more information regarding our reportable segments please refer to Note 18, “Segment Information” to our consolidated financial statements.

Segment Results for the Three Months Ended ~~June~~September 30, 2022 and 2021

The following tables compare segment net revenue and segment income for the three months ended ~~June~~September 30, 2022 to the three months ended ~~June~~September 30, 2021:


		Three Months Ended June 30,											Three Months Ended September 30,
(thousands of U.S. dollars)	(thousands of U.S. dollars)	2022			2021			$ Change		% Change		(thousands of U.S. dollars)	2022			2021			$ Change		% Change

Net Revenues	Net Revenues											Net Revenues
Sterigenics	Sterigenics	$	157,792		$	145,182		$	12,610	8.7	%	Sterigenics	$	157,723		$	145,314		$	12,409	8.5	%
Nordion	Nordion	50,478			49,125			1,353		2.8	%	Nordion	35,071			28,768			6,303		21.9	%
Nelson Labs	Nelson Labs	58,369			57,610			759		1.3	%	Nelson Labs	55,910			52,082			3,828		7.3	%
Segment Income	Segment Income											Segment Income
Sterigenics	Sterigenics	$	85,098		$	79,569		$	5,529	6.9	%	Sterigenics	$	85,587		$	79,344		$	6,243	7.9	%
Nordion	Nordion	29,982			31,168			(1,186)		(3.8)	%	Nordion	20,294			16,331			3,963		24.3	%
Nelson Labs	Nelson Labs	21,055			23,826			(2,771)		(11.6)	%	Nelson Labs	19,271			20,999			(1,728)		(8.2)	%
Segment Income margin	Segment Income margin											Segment Income margin
Sterigenics	Sterigenics	53.9		%	54.8		%					Sterigenics	54.3		%	54.6		%
Nordion	Nordion	59.4		%	63.4		%					Nordion	57.9		%	56.8		%
Nelson Labs	Nelson Labs	36.1		%	41.4		%					Nelson Labs	34.5		%	40.3		%

Net Revenues by Segment

Sterigenics net revenues were ~~$157.8~~$157.7 million for the three months ended ~~June~~September 30, 2022, an increase of ~~$12.6~~$12.4 million, or ~~8.7%~~8.5%, as compared to the three months ended ~~June~~September 30, 2021. The increase ~~reflects~~is attributable to a ~~6.1%~~6.0% favorable impact from pricing and volume growth of ~~5.1%~~5.8%, partially offset by a 3.3% unfavorable ~~impacts~~impact from changes in foreign currency exchange ~~rates of 2.5%.~~rates.

Nordion net revenues were ~~$50.5~~$35.1 million for the three months ended ~~June~~September 30, 2022, an increase of ~~$1.4~~$6.3 million, or ~~2.8%~~21.9%, as compared to the three months ended ~~June~~September 30, 2021. The increase was primarily attributable to volume growth of 17.7% and favorable pricing of ~~6.1%~~7.0% partially offset by a ~~3.1%~~2.8% unfavorable impact from changes in foreign currency exchange rates.

Nelson Labs net revenues were ~~$58.4~~$55.9 million for the three months ended ~~June~~September 30, 2022, an increase of ~~$0.8~~$3.8 million, or ~~1.3%~~7.3%, as compared to the three months ended ~~June~~September 30, 2021. ~~Revenue from the RCA acquisition contributed 5.7% and~~The increase was driven by favorable pricing ~~represented 5.4%. Partially offsetting these increases~~of 6.3% and 5.8% from our recent acquisition. This was ~~a 5.0% decline in revenue from reduced demand for pandemic-related testing. In addition, revenue growth was negatively impacted~~partially offset by ~~2.6% due to~~ changes in foreign currency ~~exchanges rates.~~exchange rates totaling 3.5%.

Segment Income

Sterigenics segment income was ~~$85.1~~$85.6 million for the three months ended ~~June~~September 30, 2022, an increase of ~~$5.5~~$6.2 million, or ~~6.9%~~7.9%, as compared to the three months ended ~~June~~September 30, 2021. The increase in segment income was primarily a result of favorable customer pricing and sales volume growth, as referenced above.

Nordion segment income was ~~$30.0~~$20.3 million for the three months ended ~~June~~September 30, 2022, ~~a decrease~~an increase of ~~$1.2~~$4.0 million, or ~~3.8%~~24.3%, as compared to the three months ended ~~June~~September 30, 2021. The ~~decrease~~increase in segment income was due to an increase in sales volume, largely of industrial use Co-60, and ~~segment income margin was driven~~favorable pricing, partially offset by ~~an unfavorable product mix and~~ changes in foreign currency ~~exchanges~~exchange rates.

Nelson Labs segment income was ~~$21.1~~$19.3 million for the three months ended ~~June~~September 30, 2022, a decrease of ~~$2.8~~$1.7 million, or ~~11.6%~~8.2%, as compared to the three months ended ~~June~~September 30, ~~2021,~~2021. The decrease in segment income was primarily ~~attributable to the decline~~driven by increased staffing in ~~higher margin pandemic-related testing. This decrease was~~anticipation of incremental volume, unfavorable revenue mix and an unfavorable impact from foreign currency exchange rates, partially offset by ~~the incremental contribution of the RCA acquisition and~~ favorable ~~customer pricing.~~pricing as mentioned above. The ~~5.3%~~ decrease in segment income margin ~~was driven by recent acquisitions and an unfavorable mix associated~~is a result of the aforementioned factors coupled with ~~reduced demand for pandemic-related testing.~~dilution resulting from the margin profile of the 2021 Nelson Labs acquisitions.

4143

Segment Results for the ~~Six~~Nine Months Ended ~~June~~September 30, 2022 and 2021

The following tables compare segment net revenue and segment income for the ~~six~~nine months ended ~~June~~September 30, 2022 to the ~~six~~nine months ended ~~June~~September 30, 2021:


		Six Months Ended June 30,											Nine Months Ended September 30,
(thousands of U.S. dollars)	(thousands of U.S. dollars)	2022			2021			$ Change		% Change		(thousands of U.S. dollars)	2022			2021			$ Change		% Change

Net Revenues	Net Revenues											Net Revenues
Sterigenics	Sterigenics	$	307,254		$	276,333		$	30,921	11.2	%	Sterigenics	$	464,977		$	421,647		$	43,330	10.3	%
Nordion	Nordion	84,480			75,043			9,437		12.6	%	Nordion	119,551			103,811			15,740		15.2	%
Nelson Labs	Nelson Labs	111,659			112,689			(1,030)		(0.9)	%	Nelson Labs	167,569			164,771			2,798		1.7	%
Segment Income	Segment Income											Segment Income
Sterigenics	Sterigenics	$	164,501		$	148,030		$	16,471	11.1	%	Sterigenics	$	250,088		$	227,374		$	22,714	10.0	%
Nordion	Nordion	48,885			44,954			3,931		8.7	%	Nordion	69,179			61,285			7,894		12.9	%
Nelson Labs	Nelson Labs	38,098			46,896			(8,798)		(18.8)	%	Nelson Labs	57,369			67,895			(10,526)		(15.5)	%
Segment Income margin	Segment Income margin											Segment Income margin
Sterigenics	Sterigenics	53.5		%	53.6		%					Sterigenics	53.8		%	53.9		%
Nordion	Nordion	57.9		%	59.9		%					Nordion	57.9		%	59.0		%
Nelson Labs	Nelson Labs	34.1		%	41.6		%					Nelson Labs	34.2		%	41.2		%

Net Revenues by Segment

Sterigenics net revenues were ~~$307.3~~$465.0 million for the ~~six~~nine months ended ~~June~~September 30, 2022, an increase of ~~$30.9~~$43.3 million, or ~~11.2%~~10.3%, as compared to the ~~six~~nine months ended ~~June~~September 30, 2021. The increase reflects volume growth of ~~7.3%~~6.8% and a ~~5.8%~~5.9% favorable impact from pricing, partially offset by unfavorable impacts from changes in foreign currency exchange rates of ~~1.9%~~2.4%.

Nordion net revenues were ~~$84.5~~$119.6 million for the ~~six~~nine months ended ~~June~~September 30, 2022, an increase of ~~$9.4~~$15.7 million, or ~~12.6%~~15.2%, as compared to the ~~six~~nine months ended ~~June~~September 30, 2021. The increase reflects volume growth of 11.0% and a 6.5% favorable impact from pricing, partially offset by unfavorable impacts from changes in foreign currency exchange rates of 2.3%.

Nelson Labs net revenues were $167.6 million for the nine months ended September 30, 2022, an increase of $2.8 million, or 1.7%, as compared to the nine months ended September 30, 2021. The increase was ~~driven by volume~~mainly attributable to revenue growth from the 2021 acquisitions of ~~8.4%~~6.7% and a favorable impact from pricing of ~~6.4%, partially offset by foreign currency impacts of 2.2%~~5.3%.

~~Nelson Labs net revenues were $111.7 million for the six months ended June 30, 2022,~~ Partially offsetting this increase was a ~~decrease of $1.0 million, or 0.9%, as compared to the six months ended June 30, 2021. The decrease was mainly attributable to a 7.8%~~6.5% decline in revenue from reduced demand for pandemic-related testing coupled with a decrease in volumes across other testing categories. ~~In addition, revenue~~Revenue growth was ~~unfavorably~~also negatively impacted by ~~2.0%~~2.5% due to changes in foreign currency ~~exchanges~~exchange rates. ~~Partially offsetting this decline was revenue growth from the 2021 acquisitions of RCA and BioScience Labs of 7.0% and a favorable impact from pricing of 4.8%.~~

Segment Income

Sterigenics segment income was ~~$164.5~~$250.1 million for the ~~six~~nine months ended ~~June~~September 30, 2022, an increase of ~~$16.5~~$22.7 million, or ~~11.1%~~10.0%, as compared to the ~~six~~nine months ended ~~June~~September 30, 2021. The increase in segment income was primarily a result of ~~sales~~ volume growth and favorable customer pricing, as referenced above.

Nordion segment income was ~~$48.9~~$69.2 million for the ~~six~~nine months ended ~~June~~September 30, 2022, an increase of ~~$3.9~~$7.9 million, or ~~8.7%~~12.9%, as compared to the ~~six~~nine months ended ~~June~~September 30, 2021. The increase in segment income was due to ~~the~~ favorable impacts of volume growth and customer pricing, as referenced above. The decrease in segment income margin was due to an unfavorable product mix.

Nelson Labs segment income was ~~$38.1~~$57.4 million for the ~~six~~nine months ended ~~June~~September 30, 2022, a decrease of ~~$8.8~~$10.5 million, or ~~18.8%~~15.5%, as compared to the ~~six~~nine months ended ~~June~~September 30, 2021, primarily attributable to ~~the~~a decline in pandemic-related testing. This decrease was partially offset by the incremental contribution of ~~the BioScience Labs and RCA~~our 2021 acquisitions and favorable customer pricing. The ~~7.5%~~7.0% decrease in segment income margin was driven by unfavorable mix associated with reduced demand for pandemic-related testing, supply chain ~~pressures,~~and labor market ~~constraints, which were compounded by the surge~~pressures, increased staffing in anticipation of ~~the Omicron variant in the first quarter of 2022,~~incremental volume, and dilution resulting from the margin profile of the 2021 Nelson Labs acquisitions.

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LIQUIDITY AND CAPITAL RESOURCES

The primary sources of liquidity for our business are cash flows from operations and borrowings under our credit facilities. We expect that our primary liquidity requirements will be to make capital expenditures, including investments in fixed assets to build and/or expand existing facilities, to fund suitable business acquisitions, service our debt, and make expenditures for other general corporate purposes.

As of ~~June~~September 30, 2022, we had ~~$140.6~~$165.0 million of cash and cash equivalents. This is an increase of ~~$33.7~~$58.0 million from the balance at December 31, 2021. Our foreign subsidiaries held cash of approximately ~~$114.7~~$122.6 million at ~~June~~September 30, 2022 and $87.9 million at December 31, 2021. No material restrictions exist to accessing cash held by our foreign subsidiaries notwithstanding any potential tax consequences.

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, ~~Co-60~~cobalt development projects and information technology enhancements. ~~During~~For the ~~six~~nine months ended ~~June~~September 30, 2022, our capital expenditures amounted to ~~$71.6~~$110.6 million, compared to ~~$44.8~~$60.9 million for the ~~six~~nine months ended ~~June~~September 30, 2021.

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,~~ including 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 defense costs 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 ~~June~~September 30, 2022, 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~~expenditure and debt service requirements will depend on our future financial performance, which will be affected by a range of macroeconomic, competitive and business factors, including interest rate changes and changes in our industry, many of which are outside of our control. As of ~~June~~September 30, 2022, our interest rate caps limit our cash flow exposure related to LIBOR for the majority of the principal amount outstanding on our variable rate borrowings under the Term Loan. Refer to Note 17, “Financial Instruments and Financial Risk” under the heading “Derivative Instruments” for additional information regarding the interest rate caps used to manage economic risks associated with our variable rate borrowings. Refer to Item 3. “Quantitative and Qualitative Disclosures About Market Risk” for additional information about changes in interest rate risk.

In addition to our operations, our primary long-term liquidity requirements include servicing our debt, investing in capital expenditures, supporting ongoing EO litigation defense costs, funding suitable business acquisitions, and making expenditures for other general corporate purposes. Any liability determined to be attributable to the Company or its subsidiaries arising from the ongoing EO tort litigation may have a material adverse effect on the Company’s results of operations, liquidity, or financial condition for the annual or interim period during which such liability is recorded. As described in Note 16, “Commitments and Contingencies”, on September 20, 2022, the court returned an adverse judgment against our subsidiaries Sterigenics U.S., LLC and Sotera Health LLC in the amount of $358.7 million in a personal injury jury trial in Illinois. As noted in Note 16, we intend to vigorously challenge the judgment through all appropriate post-trial motions and appeals processes. Based on the status of the first individual case, we believe a loss is not probable, but the range of loss for this case could be from $0 to $358.7 million, plus potential post-judgment interest. We have not recorded a reserve with respect to this litigation as a number of factors (including post-trial relief and the appeals processes which are anticipated to take at least eighteen months or longer) could significantly change the assessment of damages and the ultimate outcome of the case. The plaintiff began enforcement proceedings by issuing citations to discover assets to Sterigenics U.S., LLC and Sotera Health LLC, the Company and other subsidiaries, which may have the effect of creating liens on certain of our assets. These enforcement proceedings were stayed by the filing of post-trial motions.

In order to stay the enforceability of the judgment order during the appeals process, an appellate bond must be posted or an alternative form of security must be provided. Our subsidiaries are exploring options to post the appellate bond or alternative form of security, which could involve additional credit support from the Company, if the Company so determines, and/or posting cash collateral of the subsidiaries, or other form of security as may be required by the courts, and on which such subsidiaries will incur interest and other associated costs. The bond or other form of security ordinarily must be sufficient to cover the amount of the judgment and costs, plus interest reasonably anticipated to accrue during pendency of the appeal. Given the pendency of motions for post-trial relief requesting that the trial court enter judgment in defendants’ favor notwithstanding the verdict, or alternatively that a new trial be granted, or alternatively for reduction of the compensatory and punitive damages awards, as well as the courts’ ability to reduce the amount of any bond or other security, the amount of the bond or other security that will ultimately be required to be posted is uncertain.

Refer to Note 16, “Commitments and Contingencies” under the heading “Ethylene Oxide Tort Litigation” for additional information regarding the current status of the Company’s legal proceedings. Refer also to Part II Item 1A, “Risk Factors” in this report, including “—We have received and may in the future receive an adverse judgment in the EO tort litigation. We face enforcement efforts related to the adverse judgment. In connection with any appeal, we may be required to post an appellate

bond or provide an alternative form of security. Any of these matters may have a negative impact on our liquidity in the near and long terms.”

Cash Flow Information

(thousands of U.S. dollars) Six Months Ended June 30,
2022 2021
Net Cash Provided by (Used in):
Operating activities $ 108,256 $ 134,256
Investing activities (71,192) (70,974)
Financing activities (1,083) (12,090)
Effect of foreign currency exchange rate changes on cash and cash equivalents (2,287) 2,578
Net increase in cash and cash equivalents, including restricted cash, during the period $ 33,694 $ 53,770
Nine Months Ended September 30, 2022 compared to the Nine Months Ended September 30, 2021


(thousands of U.S. dollars)	2022		2021

Net Cash Provided by (Used in):
Operating activities	$	176,035	$	215,194
Investing activities	(110,158)		(87,570)
Financing activities	(1,483)		(115,504)
Effect of foreign currency exchange rate changes on cash and cash equivalents	(6,357)		345
Net increase in cash and cash equivalents, including restricted cash, during the period	$	58,037	$	12,465

Operating activities

Cash flows provided by operating activities decreased ~~$26.0~~$39.2 million to net cash provided of ~~$108.3~~$176.0 million in the ~~six~~nine months ended ~~June~~September 30, 2022 compared to ~~$134.3~~$215.2 million for the ~~six~~nine months ended ~~June~~September 30, 2021. ~~The decrease in~~Lower cash flows from operating activities in the ~~six~~nine months ended ~~June~~September 30, 2022 compared to the ~~six~~nine months ended ~~June~~September 30, 2021 ~~was~~were driven ~~primarily~~ by an increase in cash paid for income taxes and interest of ~~$14.6~~$24.6 million and ~~a $5.4~~$11.3 million, ~~increase in cash paid for interest.~~respectively.

Investing activities

Cash used byin investing activities increased ~~$0.2~~$22.6 million to net cash used of ~~$71.2~~$110.2 million in the ~~six~~nine months ended ~~June~~September 30, 2022 compared to ~~$71.0~~$87.6 million for the ~~six~~nine months ended ~~June~~September 30, ~~2022.~~2021. Capital expenditures increased ~~$26.9~~$49.7 million in the ~~six~~nine months ended ~~June~~September 30, 2022 compared to the ~~six~~nine months ended ~~June~~September 30, 2021. The nine months ended September 30, 2021 included cash paid for acquisitions of ~~$26.2~~$25.9 million which did not recur in 2022. In the nine months ended September 30, 2021, we acquired BioScience Labs for a net purchase price of approximately ~~$13.8~~$13.5 million and we completed the acquisition of the remaining 15% ownership of Nelson Labs Fairfield for $12.4 million.

Financing activities

~~Cash~~For the nine months ended September 30, 2022, net cash used ~~for~~in financing activities ~~decreased $11.0~~was $1.5 million compared to net cash used by financing activities of ~~$1.1~~$115.5 million for the ~~six~~nine months ended ~~June~~September 30, ~~2022 compared to $12.1~~2021. For the nine months ended September 30, 2021, the principal uses of cash in financing activities were $100.0 million for the ~~six months ended June 30, 2021. The difference was attributable to~~full redemption of the ~~payment~~First Lien Notes, $8.4 million for the acquisition of ~~$3.7~~the noncontrolling interests in our China subsidiaries and $6.7 million of debt issuance costs ~~in the six months ended June 30, 2021~~and prepayment premium incurred in connection with our ~~January 2021~~ refinancing of the Senior Secured Credit Facilities ~~(as described in “Debt Facilities” below)~~ and ~~a $7.7 million payment~~the early redemption of the First Lien Notes, respectively. Cash used for financing activities was insignificant for the ~~acquisition of our Chinese subsidiaries noncontrolling interests.~~nine months ended September 30, 2022.

Debt Facilities

Senior Secured Credit Facilities

was reduced from 100 basis points to 50 basis points. The changes resulted in an effective reduction in current interest rates of 225 basis points. In connection with this amendment, we wrote off $11.3 million of unamortized debt issuance and discount costs and incurred an additional $2.9 million of expense related to debt issuance costs attributable to the refinancing. These costs were recorded to “Loss on extinguishment of debt” in our Consolidated Statements of Operations and Comprehensive Income (Loss).

On March 26, 2021, we amended the Revolving Credit Facility, to (i) decrease the Applicable Rate (as defined in the Credit Agreement) related to any Revolving Loans (as defined in the Credit Agreement) from a rate per annum that ranged from an alternative base rate (“ABR”) plus 2.50% to ABR plus 3.00% depending on SHH’s Senior Secured First Lien Net Leverage Ratio to ABR plus 1.75%; and in the case of Eurodollar Loans (as defined in the Credit Agreement) from a rate per annum which ranged from the Adjusted LIBOR plus 3.50% to the Adjusted LIBOR plus 4.00% depending on SHH’s Senior Secured First Lien Net Leverage Ratio (as defined in the Credit Agreement), to the Adjusted LIBOR (as defined in the Credit Agreement) plus 2.75% and (ii) extend the maturity date of the Revolving Facility from December 13, 2024 to June 13, 2026. The other material terms of the Credit Agreement ~~remain~~are unchanged and the amendment does not change the capacity of our Revolving Credit Facility. No unamortized debt issuance costs associated with the Revolving Credit Facility were written off and direct fees and costs incurred in connection with the amendment were immaterial.

Term Loan Interest Rate Risk Management

First Lien Notes

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, estimates and assumptions at a specific point in time and in certain circumstances that affect amounts reported in the accompanying consolidated financial statements. In preparing these consolidated financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality. The application of accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

A comprehensive discussion of the Company’s critical accounting policies and management estimates made in connection with the preparation of the financial statements is included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes in critical accounting policies, management estimates or accounting policies since the year ended December 31, 2021.

NEW ACCOUNTING PRONOUNCEMENTS

For a description of recent accounting pronouncements applicable to our business, see Note 2, “Recent Accounting Standards”.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risks are described within “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021. ~~These market risks~~

As noted in Part II, Item 7A of the 2021 Form 10-K, we are subject to interest rate risk on borrowings that bear interest at floating rates. During the nine months ended September 30, 2022, benchmark interest rates, including LIBOR, have ~~not~~ materially ~~changed~~increased compared to the same period in the prior year, primarily in response to monetary policies implemented throughout the United States and Europe aimed at curbing inflation. Because our Senior Secured Credit Facilities bear interest at variable interest rates based on LIBOR, we may incur higher interest costs as interest rates are expected to increase in future periods. We currently utilize, and may in the future utilize, interest rate hedges to mitigate our exposure to interest rate fluctuations as described in Note 17, “Financial Instruments and Financial Risk”. After applying the effects of interest rate caps referenced above, a 1.0% increase in the interest rate under our outstanding obligations as of September 30, 2022, of $1,763.1 million, would increase interest expense by approximately $7.6 million for the ~~three and six months ended June 30, 2022.~~

fiscal year ending December 31, 2023.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of the Company’s “disclosure controls and procedures,” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)). Based upon their evaluation, the ~~Chief Executive Officer~~CEO and ~~Chief Financial Officer~~CFO concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”), and that such information is accumulated and

communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control

During the three and ~~six~~nine months ended ~~June~~September 30, 2022, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II—OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we may be subject to various legal proceedings arising in the ordinary course of our business, including claims relating to personal injury, property damage, workers’ compensation and employee safety. In addition, from time to time, we receive communications from government or regulatory agencies concerning investigations or allegations of noncompliance with laws or regulations in jurisdictions in which we operate. At this time, and except as is noted herein, we are unable to predict the outcome of, and cannot reasonably estimate the impact of, any pending litigation matters, matters concerning allegations of non-compliance with laws or regulations and matters concerning other allegations of other improprieties, or the incidence of any such matters in the future. Information regarding our legal proceedings is included below. Updates on our EO tort litigation can be found from time to time on the Investor Relations section of the Company’s website.

Legal Proceedings Described in Note 16, “Commitments and Contingencies”of Our Consolidated Financial Statements

Note 16, “Commitments and Contingencies” to our consolidated financial statements for the three and ~~six~~nine months ended ~~June~~September 30, 2022 contained in this Quarterly Report on Form 10-Q includes information on legal proceedings that constitute material contingencies for financial reporting purposes that could have a material effect on our financial condition or results of operations. This item should be read in conjunction with Note 16, “Commitments and Contingencies” for information regarding the following legal proceedings, which information is incorporated into this item by reference:

•Ethylene Oxide Tort Litigation – Illinois and Georgia

•Georgia Facility Operations Litigation; and

•New Mexico Attorney General Litigation

Legal Proceedings That Are Not Described in Note 16, “Commitments and Contingencies” to Our Consolidated Financial Statements

In addition to the matters that are identified in Note 16, “Commitments and Contingencies” to our consolidated financial statements for the three and ~~six~~nine months ended ~~June~~September 30, 2022 contained in this Quarterly Report on Form 10-Q, and incorporated into this item by reference, the following matter also constitutes a material pending legal proceeding, other than ordinary course litigation incidental to our business, to which we are or any of our subsidiaries is a party.

Zoetermeer, Holland Criminal Proceedings and Criminal Financial Investigation

In early 2010, the Dutch Public Prosecution Service started criminal proceedings against DEROSS Holding B.V. (“DEROSS”), formerly known as Sterigenics Holland B.V., in relation to alleged environmental permit violations for EO emissions in the period from 2004 to 2009 at its Zoetermeer processing facility. On the basis of the final indictment issued in April 2017, assuming a rarely applied increasing mechanism is not applied in this case, fines in the amount of €0.8 million (US$0.8 million) may be imposed. We have also agreed to defend and indemnify the two individuals overseeing environmental compliance during the time period of the alleged claims by the Public Prosecutor. Assuming a rarely applied increasing mechanism is not applied in this case, the possible monetary penalties relating to the individuals currently are estimated at a maximum of €0.2 million (US$0.2 million).

In November 2010, the Public Prosecution Service also started a criminal financial investigation against DEROSS to determine whether it obtained illegal advantages by committing the alleged criminal offenses noted above. Any illegally obtained advantage could then be recovered from DEROSS in subsequent confiscation proceedings. The Public Prosecution Service estimates the illegally obtained advantage by DEROSS to be in the amount of €0.6 million (US$0.6 million).

In February 2018, DEROSS and the two individuals received favorable judgments from the trial court, which did not hold any of them responsible for the alleged criminal offenses. In March 2018, the Public Prosecutor filed an appeal against the favorable judgments. The appeal procedure is still pending.

An escrow account was established in 2011 to satisfy indemnity claims for losses related to this matter. The balance of the special escrow at ~~June~~September 30, 2022 was approximately US$1.8 million and the cash collateral held by ABN Amro to provide security for the claims ~~against us~~ was approximately €2.4 million (US$~~2.5~~2.4 million) as of ~~June~~September 30, 2022. These amounts are available to satisfy claims relating to the ongoing matter through its anticipated resolution. At this time, we expect that the appeal of this matter will likely take several years to ~~resolve;~~resolve, however, we believe the indemnification receivable continues to be recoverable and plan to ensure escrow funds remain in place to cover outcomes of an appeal.

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It is possible that individuals living in the vicinity of our former Zoetermeer facility may file civil claims at some time in the future. While we have received letters from a small number of individuals claiming to live or work in the vicinity of the Zoetermeer facility, no civil claims have been filed against DEROSS or us. We have not provided for a contingency reserve in connection with any civil claims as we are unable to determine the likelihood of an unfavorable outcome and no reasonable estimate of a loss or range of losses, if any, can be made.

Item 1A. Risk Factors.

~~There~~Other than the risk factors listed below, there have been no material changes tofrom the risk factors previously ~~disclosed in our 2021 Form 10-K. Refer to Part I,~~described under Item 1A of our 2021 Form ~~10-K~~10-K.

Risks Related to the Company

We are currently defending certain litigation, and we are likely to be subject to additional litigation in the future.

Our business exposes us to significant potential risk from lawsuits, investigations and other legal proceedings. We are currently pursuing and defending various proceedings and will likely be subject to additional proceedings in the future, including potential litigation regarding the products and services we provide or which we or our predecessors have provided. We are currently the subject of tort lawsuits alleging personal injury by purported exposure to emissions and releases of EO from our facilities in Willowbrook and Atlanta. The first jury trial in the individual lawsuits related to our facility in Willowbrook began on August 12, 2022, and on September 19, 2022, the jury rendered a verdict in favor of the plaintiff and awarded damages in the amount of $358.7 million, including $36.1 million of compensatory damages, $320.0 million of punitive damages and prejudgment interest in the amount of $2.6 million against our subsidiaries Sterigenics, US LLC and Sotera Health LLC. Post-judgment interest accrues on the compensatory and punitive damages awards from September 20, 2022, the date the court entered the judgment order. The Company expects the enforceability of the judgment order to be stayed pending the resolution of motions for post-trial relief and any subsequent appeals. See related Risk Factor “—We have received and may in the future receive an adverse judgment in the EO tort litigation. We face enforcement efforts related to the adverse judgment. In connection with any appeal, we may be required to post an appellate bond or provide an alternative form of security. Any of these matters may have a negative impact on our liquidity in the near and long terms.” On October 26, 2022, Sterigenics U.S., LLC and Sotera Health LLC filed their motion for post-trial relief, requesting that the trial court enter judgment in defendants’ favor notwithstanding the verdict, or alternatively that a new trial be granted, or alternatively for reduction of the compensatory and punitive damages awards, based on the plaintiff’s failure of proof on elements of her claims, reversible error by the trial court regarding evidentiary and other rulings, and excessive damages awards. While the Company does not believe that the facts and law justify the verdict or damage awards and intends to vigorously challenge them through all appropriate motions for post-trial relief and appeals, this verdict and damage awards and future verdict and damage awards to which we may be subject could have a material adverse effect on our business, prospects, financial condition or results of operations.

Additionally, we are defendants in a lawsuit by certain employees of a contract sterilization customer in Georgia who allege personal injury by purported workplace exposure to EO. We are also defendants in lawsuits alleging that our Atlanta facility has devalued and harmed plaintiffs’ use of real properties they own in Smyrna, Georgia and caused other damages. Additional property devaluation claims have been threatened and additional personal injury claims may be filed. We are also defendants in a lawsuit brought by the State of New Mexico, ex rel. Hector Balderas, Attorney General alleging that emissions of EO from our Santa Teresa facility constitute a public nuisance and have materially contributed to increased health risks suffered by residents in the area. In June 2021, the Court in that lawsuit entered an Order Granting Preliminary Injunction prohibiting Sterigenics from allowing any uncontrolled emission or release of EO from the facility. In December 2021 the Court in that lawsuit further ordered certain protocols to monitor Sterigenics’ compliance with the injunction. We deny the allegations in these claims and are vigorously defending against them. However, one or more adverse judgments could result in significant liability for us and have a material adverse effect on our business, financial condition and results of operations. In addition, we are involved in litigation in Georgia against local officials to allow us to resume operations at our Atlanta facility that had been suspended while we installed enhancements to our EO emissions control systems. See Part II Item 1, “Legal Proceedings” and Note 16, “Commitments and Contingencies” to our consolidated financial statements for more detail on our pending litigation.

In litigation, including those described above, plaintiffs may seek various remedies, including without limitation declaratory and/or injunctive relief; compensatory or punitive damages; restitution, disgorgement, civil penalties, abatement, attorneys’ fees, costs and/or other relief. Settlement demands may seek significant monetary and other remedies, or otherwise be on terms that we do not consider reasonable under the circumstances. In some instances, even if we comply with applicable laws and regulations, including those relating to emission standards, an adverse judgment or outcome may occur based on other applicable laws or principles of common law, including negligence and strict liability, and result in significant liability and reputational damage for us. Defense of litigation may result in diversion of management attention from other priorities. It is

likely that we will be subject to other claims in addition to those described above by or on behalf of similar groups of plaintiffs in the future relating to any of our current or former facilities or activities. In addition, awards against and settlements by our competitors or publicity associated with our current litigation could incentivize parties to bring additional claims against us.

The financial impact of litigation, particularly class action and mass action lawsuits, is difficult to assess or quantify. If we are the subject of future lawsuits, regardless of the merits of the claims at issue or the ultimate outcome of a case, any litigation could be costly to defend, could result in an increase of our insurance premiums, and exhaust any available insurance coverage. Claims against us that result in entry of a judgment or we settle that are not covered or not sufficiently covered by insurance policies, or which fall within retained liability under our policies, could have a material adverse impact on our business, prospects, financial condition or results of operations. Our current environmental liability insurance does not cover future claims related to EO. Even where we have coverage for claims brought against us, our insurance may not be adequate to cover all potential liabilities and losses arising from those claims, and we have significant self-insured retention amounts, which we would have to pay in full before obtaining any insurance proceeds. Additionally, even where a claim should be covered by insurance, an insurer might refuse coverage. To the extent our insurance coverage is inadequate and we are not successful in identifying additional coverage for such claims, we would have to pay any costs or losses in excess of policy limits, including potentially costs to defend such claims, and the amount of any settlement or judgment. For example, while our historical environmental liability insurance did cover litigation related to EO, like the litigation pending in Willowbrook, Atlanta and Santa Teresa described above, the policy under which we have received coverage has limits of $10.0 million per occurrence and $20.0 million in the aggregate. The per occurrence limit related to the Willowbrook litigation is fully utilized and the $10.0 million coverage remaining is currently being utilized for the ongoing legal costs associated with the EO claims related to our facilities in Atlanta and Santa Teresa. As of September 30, 2022, we have utilized approximately $7.5 million of the remaining $10.0 million limit. Any settlement or judgment against us arising out of the litigation pending in Willowbrook, Atlanta or Santa Teresa would likely exceed the remaining insurance recoveries available to us and could have a material adverse effect on our business, prospects, financial condition or results of operations. See Note 16, “Commitments and Contingencies” to our consolidated financial statements for more detail on our pending litigation.

We have received and may in the future receive an adverse judgment in the EO tort litigation. We face enforcement efforts related to the adverse judgment. In connection with any appeal, we may be required to post an appellate bond or provide an alternative form of security. Any of these matters may have a negative impact on our liquidity in the near and long terms.

As described elsewhere in Note 16, “Commitments and Contingencies” under the heading “Ethylene Oxide Tort Litigation,” our subsidiaries Sterigenics U.S., LLC and Sotera Health, LLC (the “Defendant Subsidiaries”) received an adverse verdict on September 19, 2022 in the amount of $358.7 million in the first EO tort case related to our Willowbrook facility, which was entered as a judgment order on September 20, 2022 (the “September 2022 adverse judgment”).

While we intend to vigorously challenge the judgment through all appropriate post-trial motions and appeal processes, under Illinois law, in order to stay the enforceability of a judgment order during the appeals process, an appellate bond or other form of security (together, an “appellate bond”) must be posted. An appellate bond ordinarily must be sufficient to cover the amount of the judgment and costs, plus interest reasonably anticipated to accrue during pendency of the appeal, which typically means that the defendants, absent judicial relief reducing the appellate bond amount, are required to post an appellate bond in an amount up to 1.5 times the amount of the judgment. Obtaining such appellate bond may require the posting of liquid collateral, such as letters of credit or cash, for some or all of the bond amount should the bond be called in the future. The Defendant Subsidiaries have filed post-trial motions that have the effect of staying enforcement proceedings. Before the post-trial motions were filed, however, the plaintiff began enforcement proceedings by issuing citations to discover assets to the Defendant Subsidiaries, Sotera Health Company, certain other subsidiaries and affiliates, and various third parties. Subject to petitions for relief and other potential proceedings, the service of these citations may have the effect of creating liens on certain of the Defendant Subsidiaries’ and other recipients’ assets that could restrict use of those assets.

It may be necessary for the Defendant Subsidiaries to request credit support from Sotera Health Company in order to obtain such appellate bond. Although Sotera Health Company has not determined whether it would be willing to provide such credit support, doing so may require it or its other subsidiaries to incur additional indebtedness, if available. Doing so may also require negotiation with current lenders under our Senior Secured Credit Facilities, the success of which cannot be assured.

If the Defendant Subsidiaries are unable to post an appellate bond for the September 2022 adverse judgment, they may need to pursue other alternatives to stay the enforceability of the judgment order pending the appeals process. In addition to the risks presented by the September 2022 adverse judgment, as disclosed elsewhere, there are a large number of EO tort cases pending against the Defendant Subsidiaries. The second trial in Illinois began on October 6, 2022 and is expected to result in a verdict by mid-November 2022, and additional trials are scheduled to begin in early 2023. While we believe the damage awards in the

first trial are not predictive of potential future damage awards in the other Illinois EO tort cases, in the event the Defendant Subsidiaries receive one or more additional adverse judgments in any of the remaining cases, the Defendant Subsidiaries may be required to post additional security to stay those judgments through the appeals process. This would create additional uncertainty about how the Defendant Subsidiaries on their own will post such collateral, or whether Sotera Health Company would be willing to or could provide parent credit support, in order to stay enforcement of any future judgments. In the event that the Defendant Subsidiaries’ appeal of the September 2022 adverse judgment is unsuccessful, they will be required to pay the judgment, which would reduce liquidity of the Defendant Subsidiaries and possibly of Sotera Health Company and may further limit the Defendant Subsidiaries’ ability to post an appellate bond for subsequent judgments.

Actions required to secure appellate bonds, including for the September 2022 adverse judgment, may create a substantial strain on the Defendant Subsidiaries’ and our liquidity. There is no assurance that the Defendant Subsidiaries or we will meet the requirements needed to provide an appellate bond for appeal of the September 2022 adverse judgment or appeals of any future adverse judgments. If the Defendant Subsidiaries are unable to meet those requirements and are not able to secure an appellate bond in the form and amount as required by the courts for appeal, that judgment will become enforceable and may exceed their ability to pay in cash. If the Defendant Subsidiaries are unable to pay in cash, the Defendant Subsidiaries or we may be required to seek financing, sell assets or take other measures to address the judgments. There can be no assurance that the Defendant Subsidiaries or we will be able to secure such financing or make such sales on acceptable terms or at all, and any such actions taken to address the judgments may significantly limit our liquidity and increase our leverage in the future.

One or more enforceable judgments in excess of $100.0 million, which judgment or judgments are not stayed or remain undischarged for a ~~detailed discussion~~period of ~~risk factors affecting us.~~sixty consecutive days, would constitute an event of default under our Senior Secured Credit Facilities. Thus, if the Defendant Subsidiaries are unable to meet collateral requirements to post an appellate bond to stay the enforceability of a judgment, absent judicial relief, we may be required to negotiate with our current lenders under our Senior Secured Credit Facilities and the success of such negotiations cannot be assured.

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Item 6. Exhibits.

The exhibits listed in the following Exhibit Index are filed, furnished, or incorporated by reference as part of this Quarterly Report on Form 10-Q.

Incorporated by Reference

Exhibit No

Description of Exhibits

Form

File No.

Exhibit

Filing Date

Furnished/Filed
Herewith

31.1

Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

10.32

Separation Agreement made as of August 31, 2022 between Terry Hammons and Sotera Health Company

101.INS

Inline XBRL Instance Document - The XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed Herewith

** Furnished Herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			SOTERA HEALTH COMPANY

			By:			/s/ Michael F. Biehl
			Name:			Michael F. Biehl
			Title:			Interim Chief Financial Officer
						(Principal Financial Officer)

Date: ~~August 4,~~November 2, 2022

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