SOTERA HEALTH COMPANY

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SOTERA HEALTH CO Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/10/2021 | 04:15pm EDT
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 2020 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 2020 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 nine months ended September 30, 2021, respectively, we
recorded net revenues of $226.2 million and $690.2 million, net income of $27.4
million and $81.1 million, Adjusted Net Income of $58.7 million and $181.9
million, and Adjusted EBITDA of $116.7 million and $356.6 million. For the
definition of Adjusted Net Income and Adjusted EBITDA and the reconciliation of
these non-GAAP measures from net income (loss), please see "Non-GAAP Financial
Measures."
STRATEGIC DEVELOPMENTS AND KEY FACTORS AFFECTING OUR RESULTS OF OPERATIONS
The following summarizes strategic developments and key factors that have
underpinned our operating results for the three and nine months ended
September 30, 2021 and may continue to affect our performance and financial
condition in future periods.
•Driving organic growth. During the three and nine months ended September 30,
2021, we continued to make investments to expand capacity and implement EO
facility enhancements in our Sterigenics business and expand our cobalt
development resources in our Nordion business. In addition, we continue to
expand capacity to meet demand for microbiological testing and extractables and
leachables testing in our Nelson Labs business.
•Disciplined and strategic M&A activity. We continue to pursue strategic
acquisitions to grow our footprint and expand our capabilities. Most recently,
in November 2021, we acquired Regulatory Compliance Associates Inc., for
approximately $31 million, bringing expertise in regulatory, quality and
compliance advisory services to our Expert Advisory Services team. On March 8,
2021, we acquired BioScience Laboratories, LLC ("BioScience Labs") with one
location in Bozeman, Montana. BioScience Labs is a provider of outsourced
topical antimicrobial and virology product testing in the pharmaceutical,
medical device, and consumer products industries. BioScience Labs' expertise in
analytical testing and clinical trial services will complement Nelson Labs'
existing strengths in antimicrobial and virology testing. In July 2020, we
acquired Iotron Industries Canada, Inc. ("Iotron"), an E-beam processing
services and equipment provider.
Additionally, on May 18, 2021, we completed the purchase of the outstanding
noncontrolling interests of 15% and 33% of our two China subsidiaries,
respectively, for a total purchase price of $8.6 million. On March 11, 2021, we
completed the acquisition of the remaining 15% ownership of Nelson Labs
Fairfield for $12.4 million. Pursuant to the terms of the transaction, we
acquired 85% of the equity interests of Nelson Labs Fairfield in August 2018 and
were required to acquire the 15% noncontrolling interest within three years from
the date of the acquisition.
•Borrowings and financing costs. A combination of lower outstanding borrowings
and reduced pricing on our debt resulted in a reduction in cash interest expense
for the three and nine months ended September 30, 2021 compared to
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the three and nine months ended September 30, 2020. On January 20, 2021 we amended our Term Loan to reduce the interest rate spread over LIBOR from 4.50% to 2.75%, and the LIBOR floor from 1.00% to 0.50%. The changes resulted in an effective reduction in current interest rates of 2.25%. We expect the amendment to provide additional cash interest savings of approximately $40.0 million per year based on the outstanding principal balance as of the date of the amendment. Interest savings in 2021 will be offset by cash and non-cash charges associated with the repricing amendment. In connection with this transaction, we wrote off approximately $11.3 million in debt issuance costs and debt discounts and incurred approximately $2.9 million in costs directly related to the refinancing transaction. On March 26, 2021, we amended our Revolving Credit Facility to reduce the interest rate spread over LIBOR applicable to revolving loans from 3.50% to 2.75%. In addition, on August 27, 2021, we redeemed in full all of the $100.0 million aggregate principal amount of the senior secured first lien notes due 2026 ("First Lien Notes"). In connection with this redemption, the Company paid a $3.0 million early redemption premium and wrote off $3.4 million of debt issuance and discount costs. We expect the redemption to provide additional cash interest savings of approximately $7.0 million per year. • Impacts of our IPO and other public company costs. As a newly public company, we continue to incur certain expenses on an ongoing basis that we did not incur as a private company including third-party and internal resources related to accounting, auditing, Sarbanes-Oxley Act compliance, legal, and investor and public relations expenses. These costs are primarily classified as selling, general and administrative ("SG&A") expenses. We continue to dedicate internal resources, hire additional personnel, and engage outside consultants to assess and document the adequacy of internal controls over financial reporting. In addition, in March 2021, we incurred costs related to a secondary offering of 25 million shares of our common stock offered by selling stockholders, which included certain affiliates of Warburg Pincus LLC and GTCR, LLC as well as certain current and former members of management of the Company. •Litigation related costs and exit activities. 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 $9.4 million and $33.5 million for the three and nine months ended September 30, 2021, respectively, relating to legal and other professional service costs, as well as $0.3 million and $1.6 million, respectively, related to the closure of the Willowbrook, Illinois facility. •Impact of COVID-19 pandemic. We remain subject to risks and uncertainties as a result of the COVID-19 pandemic. Our business continuity plans remain in effect and we have maintained certain measures to decrease exposure risk and manage our supply chain for critical materials. The extent to which our operations will continue to be impacted by the pandemic will largely depend on future developments, which still remain uncertain and cannot be predicted.

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