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 sterilization and lab
testing and advisory services to the medical device and pharmaceutical
industries. 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 months ended March 31, 2021, we recorded net revenues of $212.1
million, net income of $11.1 million, Adjusted Net Income of $51.5 million and
Adjusted EBITDA of $105.3 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 months ended March 31, 2021 and
may continue to affect our performance and financial condition in future
periods.
•Driving organic growth. During the three months ended March 31, 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. On March 8,
2021, we acquired BioScience Laboratories, LLC ("BioScience") with one location
in Bozeman, Montana for approximately $13.2 million, net of $0.8 million of cash
acquired plus the repayment of BioScience's outstanding debt of $1.9 million.
BioScience is a provider of outsourced topical antimicrobial product testing in
the pharmaceutical, medical device, and consumer products industries.
BioScience's expertise in analytical testing and clinical trial services will
complement Nelson Labs' existing strengths in antimicrobial and virology
testing. On February 8, 2021, we entered into binding agreements to purchase the
outstanding noncontrolling interests of 15% and 33% of our two China
subsidiaries, respectively, for a total purchase price of $8.6 million. The
purchase transactions are expected to close in the second quarter of 2021. In
addition, 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. In July 2020, we
acquired Iotron Industries Canada, Inc. ("Iotron"), an E-beam processing
services and equipment provider.
•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 months ended March 31, 2021 compared to the three
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months ended March 31, 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. In addition, 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%.
• Impacts of our IPO. 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, 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.
•Exit activities and 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 $13.4 million for the three months ended March 31, 2021
relating to legal and other professional service costs, as well as $0.5 million
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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