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SRCL > SEC Filings for SRCL > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for STERICYCLE INC

Form 10-Q for STERICYCLE INC


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We were incorporated in 1989 and presently serve a diverse customer base of over 537,000 customers throughout the United States, Argentina, Brazil, Canada, Chile, Ireland, Japan, Mexico, Portugal, Romania, Spain, and the United Kingdom. We have fully integrated networks including processing centers, and transfer and collection sites. We use these networks to provide a broad range of services to our customers including


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regulated waste services, regulated returns and recall management services, patient communications services, and medical safety products. The regulated waste services we provide include medical waste disposal, our Steri-Safe® medical waste and compliance program, our Clinical Services program, our Bio Systems® reusable sharps disposal management services, pharmaceutical waste disposal, and hazardous waste disposal. Our regulated returns and recall management services help pharmacies and manufacturers handle the return of unused and expired pharmaceuticals. Through ExpertRECALL™, we manage all aspects of a product recall or withdrawal for pharmaceutical, medical device, and consumer product manufacturers in a manner compliant with applicable regulations. ExpertRETRIEVAL/QA™ performs retail quality audits, consumer complaint retrieval and product retrieval services, and brand integrity monitoring for retailers, manufacturers, and other businesses. We also provide communications services to healthcare providers to improve office productivity and communications with patients. Our waste treatment technologies include autoclaving, incineration, chemical treatment, and our proprietary electro-thermal-deactivation system.

There were no material changes in the Company's critical accounting policies since the filing of its 2011 Form 10-K. As discussed in the 2011 Form 10-K, the preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates.

Highlights of the three months ended September 30, 2012:

• revenues grew to $480.5 million, a 14.2% increase over $420.9 million from the third quarter last year;

• third quarter gross margins decreased to 44.9% in 2012 from 45.2% in 2011;

• we incurred $9.6 million in pre-tax expenses related to acquisitions, loss on sale of business, and restructuring and plant closure costs;

• we incurred $1.2 million in pre-tax integration expenses related to acquisitions;

• operating income was $114.5 million, a 9.5% increase over $104.6 million from the third quarter last year;

• cash flow from operations was $88.3 million.

Highlights of the nine months ended September 30, 2012:

• revenues grew to $1.41 billion, a 14.6% increase over $1.23 billion from 2011;

• gross margins decreased to 44.7% in 2012 from 45.5% in 2011;

• we incurred $15.1 million in pre-tax expenses related to acquisitions, loss on sale of business, change in fair value of contingent consideration, and restructuring and plant closure costs;

• we incurred $3.5 million in integration pre-tax expenses related to acquisitions;

• operating income was $348.5 million, a 12.8% increase over $308.9 million from 2011;

• cash flow from operations was $277.1 million.


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THREE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2011

The following summarizes the Company's operations:



In thousands, except per share data
                                                            Three Months Ended September 30,
                                                             2012                      2011
                                                        $             %            $            %
Revenues                                            $ 480,484        100.0     $ 420,924       100.0
Cost of revenues                                      253,526         52.8       220,419        52.4
Depreciation                                           11,404          2.4        10,450         2.5

Total cost of revenues                                264,930         55.1       230,869        54.8
Gross profit                                          215,554         44.9       190,055        45.2
Selling, general and administrative expenses           82,176         17.1        72,582        17.2
Depreciation                                            2,480          0.5         2,274         0.5
Amortization                                            5,561          1.2         4,209         1.0

Total selling, general and administrative
expenses (excluding items below)                       90,217         18.8        79,065        18.8
Acquisition expenses                                    2,467          0.5         3,195         0.8
Change in fair value of contingent consideration          (11 )        0.0             0         0.0
Integration expenses                                    1,217          0.3         1,813         0.4
Restructuring costs and plant closure expense           2,250          0.5           633         0.2
Litigation Settlement                                       0          0.0           460         0.1
Loss on sale of business                                4,867          1.0           323         0.1

Income from operations                                114,547         23.8       104,566        24.8
Net interest expense                                   12,931          2.7        11,797         2.8
Income tax expense                                     35,382          7.4        32,448         7.7
Net income                                             65,746         13.7        59,744        14.2
Less: net income attributable to noncontrolling
interests                                                 269          0.1           497         0.1

Net income attributable to Stericycle, Inc.         $  65,477         13.6     $  59,247        14.1
Earnings per share- diluted                         $    0.75                  $    0.68

Revenues: Our revenues increased $59.5 million, or 14.2%, in the third quarter of 2012 to $480.5 million from $420.9 million in the same period in 2011. Domestic revenues increased $44.3 million, or 14.6%, to $348.2 million from $303.9 million in the same period in 2011. Internal revenue growth for domestic small account customers increased by $19.2 million, or approximately 11%, and internal revenue growth for large quantity customers increased by $9.6 million, or approximately 9%. Internal revenues for returns and recall management services increased by $3.0 million in 2012. Internal revenues excludes acquisitions less than one year old. Total regulated waste and returns management domestic acquisitions less than one year old contributed approximately $12.5 million to the increase in revenues.

International revenues increased $15.2 million, or 13.0%, to $132.3 million from $117.1 million in the same period in 2011. Internal growth in the international segment contributed $4.2 million in increased revenues, or approximately 4%. Internal growth


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excludes the effect of foreign exchange and acquisitions and divestitures less than one year old. The effect of exchange rate fluctuations unfavorably impacted international revenues approximately $8.0 million while acquisitions net of divestitures less than one year old contributed an additional $19.0 million in international revenues.

Cost of Revenues: Our cost of revenues increased $34.1 million, or 14.8%, in the third quarter of 2012 to $264.9 million from $230.9 million in the same period in 2011. Our domestic cost of revenues increased $24.3 million, or 15.8%, in the third quarter of 2012 to $178.0 million from $153.7 million in the same period in 2011 as a result of costs related to a proportional increase in revenues from acquisitions and internal growth.

Our international cost of revenues increased $9.8 million, or 12.7%, in the third quarter of 2012 to $87.0 million from $77.2 million in the same period in 2011 as a result of costs related to proportional increase in revenues from acquisitions and internal growth and partially impacted by changes in exchange rates.

Our consolidated gross margin percentage decreased to 44.9% during the third quarter of 2012 from 45.2% during the same period in 2011 primarily due to lower margins on newly acquired revenues offset partially by improvements in the base business margins.

Selling, General and Administrative Expenses: Excluding the effect of acquisition and integration expenses, restructuring costs, loss on sale of business, and other items ("Acquisition-related Items"), selling, general and administrative ("SG&A") expenses increased approximately $11.1 million, or 14.1%, in the third quarter of 2012 to $90.2 million from $79.1 million in the same period in 2011 primarily as investment spending supported the increase in revenues and acquired SG&A expenses. As a percentage of revenue, these costs remained at 18.8% for the third quarter 2012 and 2011.

Domestically, third quarter SG&A expenses, excluding Acquisition-related Items, increased $7.5 million, or 12.9%, to $65.6 million from $58.1 million in the same period in 2011. As percentage of revenues, SG&A was lower at 18.9% in the third quarter of 2012 compared to 19.1% in 2011. As a percentage of revenues, amortization expense of acquired intangible assets increased by 0.1%.

Internationally, third quarter SG&A expenses, excluding Acquisition-related Items, increased $3.6 million, or 17.1%, to $24.6 million from $21.0 million in the same period in 2011. As a percentage of revenues, these costs were 18.6% in 2012 compared to 17.9% in 2011. The increase in SG&A was primarily due to the increased number of international acquisitions partially offset by cost savings from the restructuring of the international management structure and the continued integration of acquisitions. SG&A expense excluding Acquisition-related Items, as a percentage to revenue, was up due to a higher ratio of amortization expense to revenues and the inclusion of stock compensation expense.

Income from Operations: Income from operations increased $10.0 million, or 9.5%, in the third quarter of 2012 to $114.5 million from $104.6 million in same period in 2011. During the quarter ended September 2012, we recognized $2.5 million in


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acquisition expenses, $1.2 million of expense related to the integration of new acquisitions, $2.3 million of restructuring expenses, and a $4.9 million loss related to a divestiture in the United Kingdom.

During the quarter ended September 2011, we recognized $3.2 million in acquisition expenses, $1.8 million related to the integration of new acquisitions, $0.6 million of restructuring costs, $0.5 million in litigation settlement, and $0.3 million loss related to a divestiture in Mexico.

Net Interest Expense: Net interest expense increased to $12.9 million during the third quarter in 2012 from $11.8 million during the same period in 2011. Our interest expense was higher in the third quarter of 2012 due primarily to a higher interest rate from the renewal of our senior credit facility in September 2011.

Income Tax Expense: Income tax expense increased to $35.4 million in the third quarter of 2012 from $32.4 million in the same period in 2011. The tax rates for the quarters ended September 30, 2012 and 2011 were 35.0% and 35.2%, respectively.

NINE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2011

The following summarizes the Company's operations:



In thousands, except per share data
                                                            Nine Months Ended September 30,
                                                           2012                         2011
                                                       $             %             $              %
Revenues                                          $ 1,409,511       100.0     $ 1,229,491        100.0
Cost of revenues                                      746,540        53.0         639,773         52.0
Depreciation                                           32,622         2.3          30,438          2.5
Restructuring costs                                         0         0.0              54          0.0

Total cost of revenues                                779,162        55.3         670,265         54.5
Gross profit                                          630,349        44.7         559,226         45.5
Selling, general and administrative expenses          240,635        17.1         214,815         17.5
Depreciation                                            6,892         0.5           6,447          0.5
Amortization                                           15,675         1.1          11,102          0.9

Total selling, general and administrative
expenses (excluding items below)                      263,202        18.7         232,364         18.9
Acquisition expenses                                    6,213         0.4          14,394          1.2
Change in fair value of contingent
consideration                                             591         0.0          (2,140 )       -0.2
Integration expenses                                    3,540         0.3           3,866          0.3
Restructuring costs and plant closure expense           3,400         0.2           1,032          0.1
Litigation settlement                                       0         0.0             460          0.0
Loss on sale of business                                4,867         0.3             323          0.0

Income from operations                                348,536        24.7         308,927         25.1
Net interest expense                                   38,264         2.7          35,929          2.9
Income tax expense                                    110,283         7.8          99,119          8.1
Net income                                            199,433        14.1         172,220         14.0
Less: net income attributable to noncontrolling
interests                                               1,506         0.1           1,757          0.1

Net income attributable to Stericycle, Inc.       $   197,927        14.0     $   170,463         13.9
Earnings per share- diluted                       $      2.28                 $      1.95


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Revenues: Our revenues increased $180.0 million, or 14.6%, for the nine months ended September 30, 2012 to $1.41 billion from $1.23 billion in same period in 2011. Domestic revenues increased $120.0 million, or 13.4%, to $1.02 billion from $895.2 million in 2011 as internal revenue growth for domestic small account customers increased by $52.1 million, or approximately 10%, and internal revenue growth for large quantity customers increased by $24.7 million, or approximately 8%. Internal revenues for returns and recall management services decreased by $0.2 million. Internal revenues exclude acquisitions less than one year old. Total domestic regulated waste and returns management acquisitions less than one year old contributed approximately $43.4 million to the increase in domestic revenues.

International revenues increased $60.0 million, or 17.9%, to $394.3 million in 2012 from $334.3 million in 2011. Internal growth in the international segment contributed $13.8 million, or approximately 4%, in increased revenues. Internal growth excludes the effect of foreign exchange and acquisitions and divestitures less than one year old. The effect of exchange rate fluctuations unfavorably impacted international revenues approximately $19.5 million and acquisitions and divestitures less than one year old contributed an additional $65.7 million to international revenues.

Cost of Revenues: Our cost of revenues increased $108.9 million, or 16.2%, for the nine months ended September 30, 2012 to $779.2 million from $670.3 million during the same period in 2011. Our domestic cost of revenues increased $67.5 million, or 14.9%, to $520.1 million from $452.6 million in the same period in 2011 as a result of costs related to a proportional increase in revenues from acquisitions and internal growth.

Our international cost of revenues increased $41.4 million, or 19.0%, to $259.1 million from $217.7 million in same period in 2011 as a result of costs related to proportional increase in revenues from acquisitions and partially driven by the impact of exchange rates.

Our consolidated gross margin percentage decreased to 44.7% during 2012 from 45.5% during 2011 due to lower margins on newly acquired revenues offset partially by improvements in the base business margins.

Selling, General and Administrative Expenses: Excluding Acquisition-related Items, SG&A expenses increased $30.8 million, or 13.3%, in the nine months ended September 30, 2012 to $263.2 million from $232.4 million in the same period in 2011. As a percentage of revenue, these costs decreased by 0.2% for the nine months ended September 30, 2012 compared to the same period in 2011.


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Domestically, SG&A, excluding Acquisition-related Items, increased $16.4 million in 2012, or 9.5%, to $189.9 million from $173.5 million in the same period in 2011. The increase was primarily due to SG&A expenses related to the acquired revenues, higher amortization, market penetration for our Sharps Management and Pharmaceutical Waste programs, investment in the Steri-Safe services, and compliance related services.

Internationally, SG&A, excluding Acquisition-related Items, increased $14.4 million in 2012, or 24.4%, to $73.3 million from $58.9 million in the same period in 2011. As a percentage of revenues, these costs were 18.6% in 2012 and 17.6% in 2011. The increase in SG&A was due to the increased number of international acquisitions partially offset by restructuring of the international management structure and the continued integration of acquisitions. SG&A expense, as a percentage of revenue, was up due to a higher ratio of amortization expense to revenues and the inclusion of stock compensation expense.

Income from Operations: Income from operations increased $39.6 million, or 12.8%, in the nine months ended September 30, 2012 to $348.5 million from $308.9 million in the same period in 2011. During the nine months ended September 30, 2012, we recognized $6.2 million in acquisition expenses, $3.5 million related to the integration of new acquisitions, $3.4 million of restructuring and plant closure costs, $4.9 million loss related to the U.K. divestiture, and $0.6 million of expense related to a change in fair value of contingent consideration.

During the nine months ended September 30, 2011, we recognized $14.4 million in acquisition expenses, $3.9 million related to the integration of new acquisitions, $1.1 million of restructuring costs, $0.5 million in litigation settlement, and $0.3 million loss related to the Mexico divestiture, partially offset by $2.1 million related to a change in fair value of contingent consideration.

Net Interest Expense: Net interest expense increased to $38.3 million in the nine months ended September 30, 2012 from $35.9 million during the same period in 2011 due to increased borrowings. Our interest expense was higher in 2012 due to a higher rate on our revolver borrowings and higher debt levels, partially offset by an additional interest expense of $1.2 million in the second quarter of 2011 due to the acceleration of amortization of finance fees related to our term loan that was repaid prior to scheduled maturity of June 2012.

Income Tax Expense: Income tax expense increased to $110.3 million for the nine months ended September 30, 2012 from $99.1 million for the comparable period in 2011. The increase was due to higher taxable income. The tax rates for the nine months ended September 30, 2012 and 2011 were 35.6% and 36.5%, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Our $1.0 billion senior credit facility maturing in September 2016, our $100.0 million private placement notes maturing April 2015, our $175.0 million private placement notes maturing in October 2017, and our $225.0 million private placement notes maturing in October 2020, all require us to comply with various financial, reporting


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and other covenants and restrictions, including a restriction on dividend payments. The financial debt covenants are the same for the senior credit facility and the private placement notes. At September 30, 2012, we were in compliance with all of our financial debt covenants.

As of September 30, 2012, we had $231.8 million of borrowings outstanding under our $1.0 billion senior unsecured credit facility, which includes foreign currency borrowings of $81.3 million. We also had $158.4 million committed to outstanding letters of credit under this facility. The unused portion of the revolving credit facility as of September 30, 2012 was $609.8 million. At September 30, 2012, our interest rates on borrowings under our revolving credit facility, including our facility fee, were as follows:

• For short-term borrowing (overnight): Federal funds rate plus 0.75%, the Eurocurrency rate plus 1.25% or prime rate plus 0.375%, whichever is higher; and

• For borrowings greater than one month: LIBOR plus 1.375%.

The weighted average rate of interest on the unsecured revolving credit facility was 1.71% per annum at September 30, 2012.

As of September 30, 2012, we had outstanding $100.0 million of seven-year 5.64% unsecured senior notes issued to nine institutional purchasers in a private placement completed in April 2008. Interest is payable in arrears semi-annually on April 15 and October 15 beginning on October 15, 2009, and principal is payable at the maturity of the notes on April 15, 2015.

As of September 30, 2012, we had outstanding $175.0 million of seven-year 3.89% unsecured senior notes and $225.0 million of 10-year 4.47% unsecured senior notes issued to 39 institutional purchasers in a private placement completed in October 2010. Interest is payable in arrears on April 15 and October 15 beginning on April 15 2011, and principal is payable at the maturity of the notes, October 15, 2017 in the case of the seven-year notes and October 15, 2020 in the case of the 10-year notes.

As of September 30, 2012, we had $365.3 million in other debt outstanding, which includes promissory notes issued in connection with acquisitions during 2004 through 2012, other foreign subsidiary bank debt, and capital lease obligations.

As of September 30, 2012, we had a $200.0 million term loan, with a rate of 1.09%, due in December 2012. We used the proceeds from this short term loan to pay down long term debt under our senior credit facility.

Working Capital: At September 30, 2012, our working capital decreased $167.6 million to negative $103.9 million compared to $63.7 million at December 31, 2011. The negative working capital is due to a short term loan of $200.0 million, proceeds of which were used to pay down long term debt. Working capital, excluding the $200.0 million short term loan, increased by $32.4 million with increases in current assets of $26.8 million and decreases in current liabilities of $5.6 million.


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Current assets increased primarily due to an increase in accounts receivable of $23.7 million. During the nine months ended September 30, 2012 we acquired $18.7 million in accounts receivable, of which $6.3 million was acquired in the third quarter, compared to only $0.2 million was acquired in the fourth quarter of 2011. Days sales outstanding ("DSO") was calculated at 59 days at December 31, 2011 and 60 days at September 30, 2012 which was affected by both acquired receivables and the number of collection days in September 2012.

Current liabilities, excluding the $200.0 million short term loan, decreased by $5.6 million. Accounts payable increased by $13.6 million, of which $2.1 million can be attributed to acquisitions in the third quarter of 2012 and the remainder related primarily to timing of payments. Accrued liabilities decreased by $18.5 million primarily related to a reduction in our taxes payable. Other current liabilities increased by $10.8 million primarily related to an increase in acquisition payments due.

Net Cash Provided or Used: Net cash provided by operating activities increased $62.0 million, or 28.8%, to $277.1 million during the nine months ended September 30, 2012 compared to $215.2 million for the comparable period in 2011. This increase was driven by strong collections and higher revenues both domestically and internationally. Our days sales outstanding ("DSO") was at 60 days in 2012 and 58 days for the comparable period 2011, while our DSO at December 31, 2011 was at 59 days. This increase was primarily due to acquisitions completed in 2011. Cash provided by operations as a ratio to net income is 139% and 125% for the nine months ended September 30, 2012 and 2011, respectively.

Net cash used in investing activities for the nine months ended September 30, 2012 was $204.3 million compared to $486.1 million in the comparable period in 2011. We had $314.0 million decrease in cash spent to acquire new businesses; during April of 2011 we acquired Healthcare Waste Solutions, Inc. for $237.0 million in cash. Our capital expenditures increased $14.7 million and, as a percentage of revenue, it increased to 3.7% in 2012 from 3.0% for the comparable period 2011.

Net cash used in financing activities was $80.7 million during the nine months ended September 30, 2012 compared to $212.0 million net cash provided in the comparable period in 2011. A change of $366.4 million related to increase in net repayments of our senior credit facility, and partially offset by share repurchases of $2.9 million compared to $81.2 million in 2011, a decrease of $78.3 million.

Guarantees: We have guaranteed a loan to JPMorganChase Bank N.A. on behalf of Shiraishi-Sogyo Co. Ltd ("Shiraishi"). Shiraishi is a customer in Japan that is expanding its medical waste management business and has a one year loan with a current balance of $6.3 million with JPMorganChase Bank N.A. that matures on May 31, 2013. We also have extended loans to Shiraishi for $15.4 million in support of its medical waste business. These amounts are collateralized with the assets of Shiraishi and related companies.

Annual Impairment Test: We completed our annual goodwill impairment test during the second quarter of 2012. We chose to perform a quantitative assessment using


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both a market approach and an income approach to determine the fair value of our reporting units. The market approach compares the market capitalization of the . . .

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