UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedMarch 31, 20082009 or
[ ] 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 0-21229
Stericycle, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 36-3640402 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
28161 North Keith Drive
Lake Forest, Illinois 60045
(Address of principal executive offices, including zip code)
(847) 367-5910
(Registrant's telephone number, including area code)
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 reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the Registrantregistrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). YES [ ] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See the definition of “accelerated filer and large“large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer [X]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Indicate by check mark whether the Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act Rule 12b-2)Act).
YES [ ] NO [X ][X]
As of May 2, 20084, 2009 there were 86,215,065 84,881,189shares of the Registrant'sregistrant's Common Stock outstanding.
Stericycle, Inc.
Table of Contents
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PART I. Financial Information |
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Item 1. Financial Statements |
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| Condensed Consolidated Balance Sheets as of |
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| March 31, | 1 |
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| Condensed Consolidated Statements of Income |
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| for the three months ended March 31, | 2 |
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| Condensed Consolidated Statements of Cash Flows |
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| for the three months ended March 31, | 3 |
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| Notes to Condensed Consolidated Financial Statements (Unaudited) | 4 | |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 12 | ||
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Item 3. Qualitative and Quantitative Disclosures about Market Risk | 16 | ||
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Item 4. Controls and Procedures |
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PART II. Other Information |
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Item 1. Legal Proceedings | 18 | ||
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Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities | 18 | ||
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Item 6. Exhibits | 19 | ||
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Signature | 19 | ||
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Certifications | 20 |
PART I. – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands, except share and per share data | In thousands, except share and per share data | In thousands, except share and per share data | ||||||||
|
| March 31, |
| December 31, |
| March 31, |
| December 31, | ||
|
| 2008 |
| 2007 |
| 2009 |
| 2008 | ||
|
| (Unaudited) |
| (Audited) |
| (Unaudited) |
| (Audited) | ||
ASSETS |
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Current Assets: |
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Cash and cash equivalents | $ | 11,205 |
| $ | 17,108 | $ | 9,096 |
| $ | 9,095 |
Short-term investments |
| 173 |
| 1,256 |
| 3,036 |
| 1,408 | ||
Accounts receivable, less allowance for doubtful accounts of $6,400 in 2008 and $6,157 in 2007 |
| 164,046 |
| 157,435 | ||||||
Accounts receivable, less allowance for doubtful accounts of $6,757 in 2009 and $6,616 in 2008 |
| 158,696 |
| 168,598 | ||||||
Deferred income taxes |
| 12,873 |
| 13,510 |
| 11,436 |
| 16,821 | ||
Other current assets |
| 21,436 |
|
| 20,967 | |||||
Prepaid expenses and other current assets |
| 28,981 |
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| 28,508 | |||||
Total Current Assets |
| 209,733 |
| 210,276 |
| 211,245 |
| 224,430 | ||
Property, Plant and Equipment, net |
| 193,560 |
| 193,039 |
| 207,985 |
| 207,144 | ||
Other Assets: |
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Goodwill |
| 1,048,522 |
| 1,033,333 |
| 1,136,874 |
| 1,135,778 | ||
Intangible assets, less accumulated amortization of $12,291 in 2008 and $12,230 in 2007 |
| 155,984 |
| 152,689 | ||||||
Intangible assets, less accumulated amortization of $14,047 in 2009 and $14,116 in 2008 |
| 171,172 |
| 170,624 | ||||||
Other |
| 18,539 |
| 18,822 |
| 21,937 |
| 21,322 | ||
Total Other Assets |
| 1,223,045 |
| 1,204,844 |
| 1,329,983 |
| 1,327,724 | ||
Total Assets | $ | 1,626,338 |
| $ | 1,608,159 | $ | 1,749,213 |
| $ | 1,759,298 |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Current portion of long-term debt | $ | 22,423 |
| $ | 22,003 | $ | 39,594 |
| $ | 38,880 |
Accounts payable |
| 27,876 |
| 40,049 |
| 29,475 |
| 33,612 | ||
Accrued liabilities |
| 97,676 |
| 75,571 |
| 90,967 |
| 93,487 | ||
Deferred revenue |
| 16,240 |
| 12,095 |
| 14,719 |
| 13,663 | ||
Total Current Liabilities |
| 164,215 |
| 149,718 |
| 174,755 |
| 179,642 | ||
Long-term debt, net of current portion |
| 649,889 |
| 613,781 |
| 723,999 |
| 753,846 | ||
Deferred income taxes |
| 136,391 |
| 125,041 |
| 152,494 |
| 147,287 | ||
Other liabilities |
| 4,699 |
| 5,544 |
| 9,391 |
| 8,043 | ||
Shareholders' Equity: |
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Common stock (par value $.01 per share, 120,000,000
shares authorized, 86,139,868 issued and outstanding
in 2008, 87,410,653 issued and outstanding in 2007) |
| 861 |
| 874 | ||||||
Common stock (par value $.01 per share, 120,000,000
shares authorized, 84,858,528 issued and outstanding
in 2009, 85,252,879 issued and outstanding in 2008) |
| 849 |
| 852 | ||||||
Additional paid-in capital |
| 124,750 |
| 197,462 |
| 50,188 |
| 67,776 | ||
Accumulated other comprehensive income |
| 28,650 |
| 30,520 | ||||||
Accumulated other comprehensive loss |
| (37,045) |
| (32,075) | ||||||
Retained earnings |
| 516,883 |
| 485,219 |
| 674,582 |
| 633,927 | ||
Total Shareholders' Equity |
| 671,144 |
| 714,075 |
| 688,574 |
| 670,480 | ||
Total Liabilities and Shareholders' Equity | $ | 1,626,338 |
| $ | 1,608,159 | $ | 1,749,213 |
| $ | 1,759,298 |
The accompanying notes are an integral part of these financial statements.
1
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
In thousands | In thousands | In thousands | ||||||||
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| Three Months Ended March 31, |
| Three Months Ended March 31, | ||||||
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| 2008 |
| 2007 |
| 2009 |
| 2008 | ||
Revenues | $ | 254,784 |
| $ | 211,049 | $ | 277,090 |
| $ | 254,784 |
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Costs and Expenses: |
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Cost of revenues |
| 135,121 |
| 111,619 |
| 142,594 |
| 135,121 | ||
Selling, general and administrative expenses |
| 45,765 |
| 36,703 |
| 50,731 |
| 45,765 | ||
Depreciation and amortization |
| 8,345 |
| 7,138 |
| 8,844 |
| 8,345 | ||
Gain on sale of business |
| -- |
| (823) | ||||||
Impairment of fixed assets |
| -- |
| 650 | ||||||
Arbitration settlement and related costs |
| 5,352 |
| -- | ||||||
Arbitration settlement and related expenses |
| -- |
| 5,352 | ||||||
Acquisition related transaction expenses |
| 610 |
| -- | ||||||
Acquisition integration expenses |
| 713 |
| 313 |
| 111 |
| 713 | ||
Total Costs and Expenses |
| 195,296 |
| 155,600 |
| 202,890 |
| 195,296 | ||
Income from Operations |
| 59,488 |
| 55,449 |
| 74,200 |
| 59,488 | ||
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Other Income (Expense): |
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Interest income |
| 402 |
| 401 |
| 174 |
| 402 | ||
Interest expense |
| (8,128) |
| (7,700) |
| (8,099) |
| (8,128) | ||
Insurance proceeds |
| -- |
| 500 | ||||||
Other expense, net |
| (443) |
| (553) |
| (809) |
| (443) | ||
Total Other Expense |
| (8,169) |
| (7,352) |
| (8,734) |
| (8,169) | ||
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Income Before Income Taxes |
| 51,319 |
| 48,097 |
| 65,466 |
| 51,319 | ||
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Income Tax Expense |
| 19,655 |
| 18,710 |
| 24,811 |
| 19,655 | ||
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Net Income | $ | 31,664 |
| $ | 29,387 | $ | 40,655 |
| $ | 31,664 |
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Earnings Per Common Share: |
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Basic | $ | 0.36 |
| $ | 0.33 | $ | 0.48 |
| $ | 0.36 |
Diluted | $ | 0.35 |
| $ | 0.32 | $ | 0.47 |
| $ | 0.35 |
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Weighted Average Number of Common Shares Outstanding: |
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Basic |
| 86,845,150 |
| 88,284,526 |
| 84,908,733 |
| 86,845,150 | ||
Diluted |
| 89,393,242 |
| 90,436,694 |
| 86,841,903 |
| 89,393,242 |
The accompanying notes are an integral part of these financial statements.
2
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
In thousands | In thousands | In thousands | ||||||||
|
| Three Months Ended March 31, |
| Three Months Ended March 31, | ||||||
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| 2008 |
| 2007 |
| 2009 |
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| 2008 | |
OPERATING ACTIVITIES: |
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Net income | $ | 31,664 |
| $ | 29,387 | $ | 40,655 |
| $ | 31,664 |
Adjustments to reconcile net income to net cash provided by operating activities: |
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Gain on sale of assets |
| -- |
| (823) | ||||||
Impairment of fixed assets |
| -- |
| 650 | ||||||
Loss on sale of fixed assets |
| 22 |
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| -- | |||||
Write-off of note receivable related to joint venture |
| 798 |
| -- |
| -- |
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| 798 | |
Stock compensation expense |
| 3,064 |
| 2,450 |
| 3,461 |
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| 3,064 | |
Excess tax benefit of disqualifying dispositions of stock options and exercise of non-qualified stock options |
| 23 |
| (576) | ||||||
Excess tax (expense)/ benefit from exercise of stock options |
| (264) |
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| 23 | |||||
Depreciation |
| 7,293 |
| 6,270 |
| 7,834 |
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| 7,293 | |
Amortization |
| 1,052 |
| 868 |
| 1,010 |
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| 1,052 | |
Deferred income taxes |
| 8,916 |
| 6,176 |
| 7,858 |
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| 8,916 | |
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: |
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Accounts receivable |
| (2,347) |
| 5,420 |
| 7,882 |
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| (2,347) | |
Accounts payable |
| (14,309) |
| (1,635) |
| (3,715) |
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| (14,309) | |
Accrued liabilities |
| 22,793 |
| (245) |
| 13,527 |
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| 22,793 | |
Deferred revenue |
| 4,104 |
| 3,632 |
| 1,096 |
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| 4,104 | |
Other assets |
| 551 |
| 1,316 |
| (3,090) |
|
| 551 | |
Net cash provided by operating activities |
| 63,602 |
| 52,890 |
| 76,276 |
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| 63,602 | |
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INVESTING ACTIVITIES: |
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Payments for acquisitions and international investments, net of cash acquired |
| (7,776) |
| (14,645) | �� | (16,296) |
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| (7,776) | |
Proceeds from maturity of short-term investments |
| 1,078 |
| 689 | ||||||
Proceeds from sale of assets |
| -- |
| 26,453 | ||||||
(Purchase of)/ proceeds from maturity of short-term investments |
| (1,664) |
|
| 1,078 | |||||
Proceeds from sale of property and equipment |
| -- |
| 49 |
| 244 |
|
| -- | |
Capital expenditures |
| (11,299) |
| (10,300) |
| (8,389) |
|
| (11,299) | |
Net cash (used in)/ provided by investing activities |
| (17,997) |
| 2,246 | ||||||
Net cash used in by investing activities |
| (26,105) |
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| (17,997) | |||||
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FINANCING ACTIVITIES: |
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Repayment of long-term debt |
| (255) |
| (16,200) |
| (2,908) |
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| (340) | |
Net borrowings on senior credit facility |
| 29,326 |
| 10,879 | ||||||
Principal payments on capital lease obligations |
| (85) |
| (111) | ||||||
Purchase/ cancellation of treasury stock |
| (79,384) |
| (46,071) | ||||||
Proceeds from other issuance of common stock |
| 2,397 |
| 3,075 | ||||||
Excess tax benefit of stock options exercised |
| (23) |
| 576 | ||||||
(Repayments)/ borrowing on senior credit facility |
| (25,112) |
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| 29,326 | |||||
Repurchase and cancellation of common stock |
| (27,482) |
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| (79,384) | |||||
Proceeds from issuance of common stock |
| 3,229 |
|
| 2,397 | |||||
Excess tax expense/ (benefit) from exercise of stock options |
| 264 |
|
| (23) | |||||
Net cash used in by financing activities |
| (48,024) |
| (47,852) |
| (52,009) |
|
| (48,024) | |
Effect of exchange rate changes on cash |
| (3,484) |
| (2,682) |
| 1,839 |
|
| (3,484) | |
Net (decrease)/ increase in cash and cash equivalents |
| (5,903) |
| 4,602 | ||||||
Net increase/ (decrease) in cash and cash equivalents |
| 1 |
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| (5,903) | |||||
Cash and cash equivalents at beginning of period |
| 17,108 |
| 13,492 |
| 9,095 |
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| 17,108 | |
Cash and cash equivalents at end of period | $ | 11,205 |
| $ | 18,094 | $ | 9,096 |
| $ | 11,205 |
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NON-CASH ACTIVITIES: |
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Net issuance of notes payable for certain acquisitions | $ | 7,044 |
| $ | 11,854 | $ | 1,900 |
| $ | 7,044 |
The accompanying notes are an integral part of these financial statements.
3
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Unless the context requires otherwise, “we”, “us” or “our” refers to Stericycle, Inc. and its subsidiaries on a consolidated basis.
NOTE 1 – BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; but the Company believes the disclosures in the accompanying condensed consolidated financial statements are adequate to make the information presented not misleading. In our opinion, all adjustments necessary for a fair presentation for the periods presented have been reflected and are of a normal recurring nature. These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto for the year ended December 31, 2007,2008, as filed wit h our Annual Report on Form 10-K for the year ended December 31, 2007.2008. The results of operations for the three months ended March 31, 20082009 are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2008.2009.
NOTE 2 – ACQUISITIONS AND DIVESTITURE
During the quarter ended March 31, 2008,2009, we completed two acquisitions. We acquired selected assets of athree domestic medical waste businessbusinesses and allcompleted the stock offunding on a regulated waste business in Canada. 2008 acquisition.
.
The aggregate net purchase price of our acquisitions including adjustments for purchase accounting, during the quarter ended March 31, 20082009 was approximately $14.8$18.2 million, of which $7.8approximately $12.9 million in cash payments related to transactions that closed in 2008 and were disbursed in early January 2009, and three acquisitions closed at the end of the quarter ended March 31, 2009 for $5.3 million, of which $3.4 million was paid in cash and $7.0$1.9 million was paid by the issuance of promissory notes. For financial reporting purposes, these acquisition transactionsour 2009 acquisitions were accounted for using the purchaseacquisition method of accounting. The purchase prices of these acquisitions, in excess of acquired tangible assets, have been primarily allocated to goodwill and are preliminary pending completion of certain intangible asset valuations. The results of operations of these acquired businesses have been included in the consolidated statements of income from the dates of acquisition.acq uisition. These acquisitions resulted in recognition of goodwill in our financial statements reflecting the complementary strategic fit that the acquired businesses brought to us.
Effective for the month ending March 31, 2008, we dissolved our relationship in a United Kingdom joint venture, White Rose Sharpsmart Limited that was formed in October 2001 prior to our acquisition of White Rose Environmental Limited in June
4
2004. This joint venture was previously consolidated in our financial statements. Please see Note 14 – Subsequent Events for additional information.
NOTE 3 – INCOME TAXES
We and our subsidiaries file U.S. federal income tax returns and income tax returns in various states and foreign jurisdictions. With a few exceptions, we are no longer subject to U.S. federal, state, local, or non-U.S. income tax examinations by tax authorities for years before 2001. Tax2002. The Internal Revenue Service (“IRS”) concluded an examination of the Company's U.S. income tax return for 2004; subsequent tax years 2005 and 2006 remain open and subject to examination by the IRS, and ourIRS. Our subsidiaries in foreign countries have tax years open ranging from 2002 through 2007.2008.
The total amount of unrecognized tax benefit reservebenefits as of March 31, 2009 and 2008 iswas $8.2 million and $3.7 million, respectively, which includesincluded immaterial amounts of interest and penalties and is reflected as a liability on the balance sheet. The amount of unrecognized tax benefit reservebenefits that, if recognized, would affect the effective tax rate is approximately $3.7$8.2 million. We do not expect a significant increase or decrease to these balances over the next twelve months. We recognize interest and penalties accrued related to income tax reserves in income tax expense. This method of accounting is consistent with prior years.
The following table summarizes the prior year. changes in unrecognized tax positions during the quarter ended March 31, 2009:
In thousands | |||
Unrecognized tax positions, January 1, 2009 | $ | 5,318 | |
Gross increases- tax positions in prior period | 1,830 | ||
Gross increases- tax positions in current period | 1,042 | ||
Unrecognized tax positions, March 31, 2009 | $ | 8,190 |
NOTE 4 – STOCK BASED COMPENSATION
At March 31, 20082009 we had stock options outstanding under the following plans:
(i)
The 2008 Incentive Stock Plan, which our stockholders approved in May 2008;
(ii)
the 2005 Incentive Stock Plan, which our stockholders approved in April 2005;
(ii)(iii)
the 2000 Nonstatutory Stock Option Plan, which our Board of Directors adopted in February 2000;
(iii)(iv)
the 1997 Stock Option Plan, which expired in January 2007;2008;
(iv)(v)
the Directors Stock Option Plan, which expired in May 2006;
(v)(vi)
the 1995 Incentive Compensation Plan, which expired in July 2005;
(vi)(vii)
and our Employee Stock Purchase Plan, which our stockholders approved in May 2001.
The following table sets forth the expense related to stock compensation:
In thousands | ||||||
|
| Three Months Ended March 31, | ||||
|
| 2008 |
|
| 2007 | |
Stock options | $ | 2,929 |
| $ | 2,355 | |
Employee stock purchase program |
| 135 |
|
| 95 | |
Total pre-tax expense | $ | 3,064 |
| $ | 2,450 |
In thousands | ||||||
|
| Three Months Ended March 31, | ||||
|
| 2009 |
|
| 2008 | |
Stock options | $ | 3,294 |
| $ | 2,929 |
5
Employee stock purchase program |
| 167 |
|
| 135 | |
Total pre-tax expense | $ | 3,461 |
| $ | 3,064 |
The following table sets forth the tax benefits related to stock compensation:
In thousands | In thousands | In thousands | ||||||||||
|
| Three Months Ended March 31, |
| Three Months Ended March 31, | ||||||||
|
| 2008 |
| 2007 |
| 2009 |
| 2008 | ||||
Tax benefit recognized in income statement | $ | 1,211 |
| $ | 937 | $ | 1,302 |
| $ | 1,211 | ||
Excess tax benefit realized |
| (23) |
| 576 |
| 264 |
| (23) |
The Black-Scholes option-pricing model is used in determining the fair value of each option grant using the assumptions noted in the table below. The expected term of options granted is based on historical experience and represents the period of time that awards granted are expected to be outstanding. Expected volatility is based upon historical volatility of the company’s stock. The expected dividend yield is zero. The risk-free interest rate is based upon the U.S. Treasury yield rates of a comparable period.
The assumptions that we used in the Black-Scholes model are as follows:
| Three Months Ended March 31, | Three Months Ended March 31, | ||||||
| 2008 |
|
| 2007 | 2009 |
|
| 2008 |
Expected term (in years) | 5.5 |
|
| 5.0 | 5.5 |
|
| 5.5 |
Expected volatility | 26.45% |
|
| 27.47% | 28.22% |
|
| 26.45% |
Expected dividend yield | 0.00% |
|
| 0.00% | 0.00% |
|
| 0.00% |
Risk free interest rate | 2.58% |
|
| 4.53% | 2.10% |
|
| 2.58% |
The weighted average grant date fair value of the stock options granted during the three months ended March 31, 2009 and 2008 was $11.70 and 2007 was $13.00, and $11.00, respectively.
Stock option activity for the three months ended March 31, 2008,2009, was as follows:
| Number of Options |
|
| Weighted Average Exercise Price per Share |
| Weighted Average Remaining Contractual Life |
|
| Aggregate Intrinsic Value |
|
|
|
|
|
| (in years) |
|
|
|
Outstanding at December 31, 2007 | 7,258,795 |
| $ | 25.41 |
|
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|
|
Granted | 973,712 |
|
| 53.26 |
|
|
|
|
|
Exercised | (167,338) |
|
| 15.03 |
|
|
|
|
|
Cancelled or expired | (83,018) |
|
| 27.79 |
|
|
|
|
|
Outstanding at March 31, 2008 | 7,982,151 |
| $ | 29.00 |
| 6.97 |
| $ | 181,434,131 |
Exercisable at March 31, 2008 | 4,240,868 |
| $ | 21.50 |
| 5.67 |
| $ | 127,438,240 |
Vested and expected to vest in the future at March 31, 2008 | 6,675,122 |
| $ | 27.36 |
| 6.68 |
| $ | 162,465,061 |
| Number of Options |
|
| Weighted Average Exercise Price per Share |
| Weighted Average Remaining Contractual Life |
|
| Aggregate Intrinsic Value |
|
|
|
|
|
| (in years) |
|
|
|
Outstanding at December 31, 2008 | 7,297,399 |
| $ | 30.97 |
|
|
|
|
|
Granted | 1,174,855 |
|
| 46.94 |
|
|
|
|
|
Exercised | (164,159) |
|
| 22.38 |
|
|
|
|
|
Cancelled or expired | (65,238) |
|
| 41.31 |
|
|
|
|
|
Outstanding at March 31, 2009 | 8,242,857 |
| $ | 33.34 |
| 6.80 |
| $ | 126,219,098 |
Exercisable at March 31, 2009 | 4,586,598 |
| $ | 25.89 |
| 5.51 |
| $ | 101,769,751 |
Vested and expected to vest in the future at March 31, 2009 | 7,921,454 |
| $ | 31.88 |
| 6.55 |
| $ | 121,581,936 |
The total intrinsic value of options exercised for the three months ended March 31, 2009 and 2008 and 2007 was $6.4$4.2 million and $3.7$6.4 million, respectively. Intrinsic value is measured using the fair market value at the date of the exercise (for options exercised) or at March 31, 20082009 (for outstanding options), less the applicable exercise price.
6
As of March 31, 2008,2009, there was $28.1$29.0 million of total unrecognized compensation expense, related to non-vested stock options, which is expected to be recognized over a weighted-average period of 2.082.09 years.
NOTE 5 – COMMON STOCK
During the quarterquarters ended March 31, 2009 and 2008, we repurchased on the open market, and subsequently cancelled, 536,346 and 1,482,185 shares of common stock.stock, respectively. The weighted average repurchase price was $47.59 and $53.56 per share.share, respectively.
During the quarter ended March 31, 2009, we settled in cash $2.5 million of share repurchases that were executed in December 2008. In addition, there was $0.5 million of current quarter share repurchases that were not settled as of March 31, 2009.
NOTE 6 – NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income per share:
In thousands, except share and per share data | In thousands, except share and per share data | In thousands, except share and per share data | ||||||||||
|
| Three Months Ended March 31, |
| Three Months Ended March 31, | ||||||||
|
| 2008 |
| 2007 |
| 2009 |
| 2008 | ||||
Numerator: |
|
|
|
|
|
|
|
| ||||
Numerator for basic earnings per share |
|
|
|
|
|
|
|
| ||||
Net income | $ | 31,664 |
| $ | 29,387 | $ | 40,655 |
| $ | 31,664 | ||
Denominator: |
|
|
|
|
|
|
|
| ||||
Denominator for basic earnings per share-weighted average shares |
| 86,845,150 |
| 88,284,526 |
| 84,908,733 |
| 86,845,150 | ||||
Effect of diluted securities: |
|
|
|
|
|
|
|
| ||||
Employee stock options |
| 2,546,946 |
| 2,149,600 |
| 1,933,170 |
| 2,546,946 | ||||
Warrants |
| 1,146 |
| 2,568 |
| -- |
| 1,146 | ||||
Dilutive potential shares |
| 2,548,092 |
| 2,152,168 |
| 1,933,170 |
| 2,548,092 | ||||
Denominator for diluted earnings per share-adjusted weighted average shares and after assumed exercises |
| 89,393,242 |
| 90,436,694 |
| 86,841,903 |
| 89,393,242 | ||||
|
|
|
|
|
|
|
|
| ||||
Earnings per share – Basic | $ | 0.36 |
| $ | 0.33 | $ | 0.48 |
| $ | 0.36 | ||
|
|
|
|
|
|
|
|
| ||||
Earnings per share – Diluted | $ | 0.35 |
| $ | 0.32 | $ | 0.47 |
| $ | 0.35 |
NOTE 7 – COMPREHENSIVE INCOME
The components of total comprehensive income are net income, the change in cumulative currency translation adjustments and gains and losses on derivative instruments qualifying as cash flow hedges. The following table sets forth the
7
components of total comprehensive income for the three months ended March 31, 20082009 and 2007:2008:
7
In thousands | In thousands | In thousands | |||||||||
|
| Three Months Ended March 31, |
| Three Months Ended March 31, | |||||||
|
| 2008 |
| 2007 |
| 2009 |
| 2008 | |||
Net income | $ | 31,664 |
| $ | 29,387 | $ | 40,655 |
| $ | 31,664 | |
|
|
|
|
|
|
|
|
| |||
Other comprehensive income: |
|
|
|
|
|
|
|
| |||
Currency translation adjustments |
| (2,109) |
| (614) |
| (5,343) |
| (2,109) | |||
Net gain / (loss) on derivative instruments |
| 239 |
| (63) | |||||||
Change in fair value of derivative instruments |
| 373 |
| 239 | |||||||
Other comprehensive income |
| (1,870) |
| (677) |
| (4,970) |
| (1,870) | |||
|
|
|
|
|
|
|
|
| |||
Total comprehensive income | $ | 29,794 |
| $ | 28,710 | $ | 35,685 |
| $ | 29,794 |
NOTE 8 – GUARANTEE
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 their medical waste management business and has a six month loan with a current balance of $4.8$5.1 million with JPMorganChase Bank N.A. that expires in May 2008.2009. The loan with JPMorganChase and our associated guarantee will beis in the process of being extended untilbeyond May 2009.2010.
NOTE 9 – GOODWILL
We have two geographical reporting segments, United States and Foreign Countries, both of which have goodwill. The changes in the carrying amount of goodwill, net of amortization, for the three months ended March 31, 20082009 were as follows:
In thousands | ||||||||
|
| United States |
|
| Foreign Countries |
|
| Total |
Balance as of January 1, 2008 | $ | 842,978 |
| $ | 190,355 |
| $ | 1,033,333 |
Changes due to currency fluctuation |
| -- |
|
| 1,843 |
|
| 1,843 |
Changes in goodwill on 2007 acquisitions |
| (1,240) |
|
| 1,828 |
|
| 588 |
Goodwill on 2008 acquisitions |
| -- |
|
| 12,758 |
|
| 12,758 |
Balance as of September 30, 2007 | $ | 841,738 |
| $ | 206,784 |
| $ | 1,048,522 |
In thousands | ||||||||
|
| United States |
|
| Foreign Countries |
|
| Total |
Balance as of January 1, 2009 | $ | 972,475 |
| $ | 163,303 |
| $ | 1,135,778 |
Changes due to currency fluctuation |
| -- |
|
| (3,412) |
|
| (3,412) |
Changes in goodwill on 2008 acquisitions |
| (670) |
|
| 1,019 |
|
| 349 |
Goodwill on 2009 acquisitions |
| 4,159 |
|
| -- |
|
| 4,159 |
Balance as of March 31, 2009 | $ | 975,964 |
| $ | 160,910 |
| $ | 1,136,874 |
NOTE 10 – LEGAL PROCEEDINGS
We operate in a highly regulated industry and must deal with regulatory inquiries or investigations from time to time that may be instituted for a variety of reasons. We are also involved in a variety of civil litigation from time to time.
As more fully discussed in Note 14 – Subsequent Events, on April 19, 2008 Stericycle entered into a settlement that resulted in a total pre-tax expense of $5.4 million, or an after-tax expense of $3.3 million, in the first quarter of 2008.
8
NOTE 11 – NEW ACCOUNTING STANDARDS
Effective January 1, 2008,2009 we adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, for all financial assets and liabilities and for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. 157-2 delayed the adoption date for nonfinancial assets and liabilities that are measured at fair value on a non-recurring basis, such as goodwill and identifiable intangible assets until January 1, 2009. We do not believe the adoption of SFAS No. 157 for our non-financial assets and liabilities, effective January 1, 2009, will have a material impact on our consolidated financial statements. Our adoption of SFAS No. 157 did not require a cumulative effect adjustment to the opening balance of our retained earnings. See Note 13 - Fair Value Measurements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115" (“SFAS No. 159”). SFAS No. 159 allows measurement at fair value of eligible financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is elected, unrealized gains and losses for that item are reported in current earnings at each subsequent reporting date. SFAS No. 159 also establishes presentation and disclosure requirements designed to draw comparisons between the different measurement attributes that we elect for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We do not have any financial assets or liabilities for which we elect the fair value option under SFAS No. 15 9.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141, Business Combinations. SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction; requires certain contingent assets and liabilities acquired to be recognized at their fair values on the acquisition date; requires contingent consideration to be recognized at its fair value on the acquisition date and changes in the fair value to be recognized in earnings until settled; requires the expensing of most transaction and restructuring costs; and generally requires the reversals of valuation allowances related to acquired deferred tax assets and changes to acquired income tax uncertainties to also be recognized in earni ngs.ea rnings. This new accounting standard is effectiverequires the company to recognize expenses to the income statement that were previously accounted for financial statements issuedas acquisition accounting and reflected on the balance sheet. Net income for fiscal years beginning after December 15, 2008. We are currently evaluating the provisionsfirst quarter of 2009 included the effect of $0.4 million of charges related to the adoption of SFAS No. 141(R) to determine. Because of the potentialinherent uncertainty of the number, structure and complexity of the acquisitions that we may complete in the future and the magnitude of the transaction expenses that we may incur in completing these acquisitions, the future impact if any,of the adoption will haveof SFAS No. 141(R) is not reasonably estimable.
Effective January 1, 2009 we adopted SFAS Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”). The objective of SFAS No. 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS No. 160 requires that minority interests be identified and presented on the consolidated statements of income in the equity section, but separate from the parent’s equity; that changes in the parent’s ownership interest be accounted for consistently and similarly as equity transactions; in a deconsolidation situation, any remaining noncontrolling equity investment and gain or loss on the deconsolidation is to be measured at fair value; that entities provide sufficient disclosures that clearly distinguish between the ownership interests of the parent and the interests of the noncontrolling owner. For the quarter ended March 31, 2009, the adoption of SFAS No. 160 did not result in a material impact to our financial positionstatements.
Effective January 1, 2009 we adopted SFAS Statement No. 161, “Disclosures about Derivative Instruments and resultsHedging Activities” (“SFAS No. 161”), to enhance the disclosure regarding the Company’s derivative and hedging activities to improve the transparency of operations.financial reporting.
NOTE 12 – GEOGRAPHIC INFORMATION
Management has determined that we have two reportable segments, United States and Foreign Countries based on our consideration of the criteria detailed in SFAS No.
9
131, “Disclosures about Segments of an Enterprise and Related Information.” Revenues
9
are attributed to countries based on the location of customers. Inter-company revenues recorded by the United States for work performed in Canada, which are immaterial, are eliminated prior to reporting United States revenues. The same accounting principles and critical accounting policies are used in the preparation of the financial statements for both reporting segments.
Detailed information for our United States reporting segment is as follows:
In thousands | In thousands | In thousands | ||||||||||
|
| Three Months Ended March 31, |
| Three Months Ended March 31, | ||||||||
|
| 2008 |
| 2007 |
| 2009 |
| 2008 | ||||
Regulated medical waste management services | $ | 177,838 |
| $ | 147,523 | $ | 202,351 |
| $ | 177,838 | ||
Regulated returns management services |
| 16,452 |
| 15,564 |
| 19,689 |
| 16,452 | ||||
Total revenue |
| 194,290 |
| 163,087 |
| 222,040 |
| 194,290 | ||||
Net interest expense |
| 6,502 |
| 5,962 |
| 6,560 |
| 6,502 | ||||
Income before income taxes |
| 48,956 |
| 41,559 |
| 56,995 |
| 48,956 | ||||
Income taxes |
| 17,972 |
| 16,503 |
| 22,202 |
| 17,972 | ||||
Net income | $ | 30,984 |
| $ | 25,056 | $ | 34,793 |
| $ | 30,984 | ||
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization | $ | 5,803 |
| $ | 5,259 | $ | 6,696 |
| $ | 5,803 |
Detailed information for our Foreign Countries reporting segment is as follows:
In thousands | In thousands | In thousands | ||||||||||
|
| Three Months Ended March 31, |
| Three Months Ended March 31, | ||||||||
|
| 2008 |
| 2007 |
| 2009 |
| 2008 | ||||
Regulated medical waste management services | $ | 60,494 |
| $ | 47,962 | $ | 55,050 |
| $ | 60,494 | ||
Net interest expense |
| 1,224 |
| 1,337 |
| 1,365 |
| 1,224 | ||||
Income before income taxes |
| 2,363 |
| 6,538 |
| 8,471 |
| 2,363 | ||||
Income taxes |
| 1,683 |
| 2,207 |
| 2,609 |
| 1,683 | ||||
Net income | $ | 680 |
| $ | 4,331 | $ | 5,862 |
| $ | 680 | ||
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization | $ | 2,542 |
| $ | 1,879 | $ | 2,148 |
| $ | 2,542 |
NOTE 13 – FAIR VALUE MEASUREMENTS
We adopted SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”) on January 1, 2008, which clarifies that fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. Under SFAS No. 157, fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of our company. Unobservable inputs are those that reflect the company’s assumptions about what market participantsp articipants would use in pricing the asset or liability develop eddeveloped based on the best information
10
available in the circumstances. The three levels of the fair value hierarchy defined by SFAS No. 157 are as follows:
10
| • |
| Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access. |
| • |
| Level 2 – Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. |
| • |
| Level 3 – Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
As required by SFAS No. 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels. The impact of our creditworthiness has been considered in the fair value measurements noted below. In addition, under SFAS No. 157, the fair value measurement of a liability must reflect the nonperformance risk of an entity.
WeAt March 31, 2009, we have $11.2$9.1 million in cash and cash equivalents, and $0.2$3.0 million of short termshort-term investments that we carry on our books at fair value using Level 1 inputs.
We have a cash flow hedge with an objective to offset foreign currency exchange risk to the U.S. dollar equivalent cash inflows on the settlement of a GBP denominated intercompany loan. The fair value of the hedge was calculated using Level 2 inputs and was recorded as a current asset of $2.5 million as of March 31, 2009 and as a liability of $2.3 million as of March 31, 2008.
We have three cash flow hedges with the objective to offset variable interest rate expense on a portion of our revolver debt with fixed rate expense. The notional amount of our three hedges is $225.0 million. The fair value of the hedge is calculated using Level 2 inputs and is recorded as a liability of $4.1 million.
There were no movements of items between fair value hierarchies.
NOTE 14 – SUBSEQUENT EVENTSDERIVATIVE INSTRUMENTS
On April 19, 2008 Stericycle and Daniels Corporation (UK) Limited (“Daniels UK”), a subsidiary of Daniels Sharpsmart Pty Limited (“Daniels”), and certain affiliated companiesIn July 2004, we entered into four forward contracts, of which three have settled, to hedge a settlement of arbitration proceedingsGBP Sterling-based intercompany loan between our US-based subsidiary, Stericycle International L.L.C. and our subsidiary in the United Kingdom, prior to any award byStericycle International Ltd. The subsidiary borrowed the arbitrator. These arbitration proceedings, which Daniels UK initiated in February 2007 under the Chartered Institute of Arbitrators’ Arbitration Rules, related to claims that our United Kingdom subsidiary, White Rose Environmental Limited (“White Rose”), had breached obligations that it owed to a joint venture that it had formed with Daniels UKfunds for the sale of Daniels reusable sharps containers. This joint venture, White Rose Sharpsmart Limited, was formed in October 2001 prior to our acquisitionpurchase of White Rose in June 2004.
AtRose. The remaining forward contract aligns with the same time as the settlementanticipated repayment schedule of the arbitration proceedings,loan and expires in July 2009. Initially, we entered into settlements with other subsidiaries of Daniels resolving various disputesdid not elect hedge accounting on the forward contracts and received a full release of all claims. In addition, we finalizedhad recognized the paymentchange in value of the legal fees that SteriCorp Limited had been awarded under the arbitrator’s award that we have previouslyhedges through other income
11
reported. In connection with(expense). This amount was generally offset by the currency adjustment to the intercompany receivable.
On October 1, 2005, we prospectively designated these net settlements, we recognized a total pre-tax expenseexisting forward contracts as cash flow hedges and are using hedge accounting. The objective of $5.4 million, or an after-tax expenseour cash flow hedges is to offset the foreign exchange risk to the U.S. dollar equivalent cash inflows on the settlement of $3.3 million thatthe GBP denominated intercompany loan. At March 31, 2009, the fair market value of the hedge was recorded as a current asset of $2.5 million. As of March 31, 2008. 2009, the total notional amount of hedges outstanding is GBP 8.0 million. At March 31, 2009, the hedges were determined to be 100% effective.
On April 15,In October 2008, weStericycle entered into a note purchase agreement with nine institutional purchasers pursuant to which we issued and sold to the purchasers $100three interest rate swap contracts covering $225 million of our 5.64%borrowings outstanding under our senior notes due April 15, 2015 (the “Notes”).credit facility. The notes bearobjective of the swap is to reduce the risk of volatile interest atexpense by fixing the rate. The contracts are as follows:
In thousands | ||||
Notional | Fixed | Variable | Expiration | |
Amount | Interest Rate | Interest Rate | Date | |
$ 125,000 | 2.79% | 1 Month Libor | October 2009 | |
$ 75,000 | 2.79% | 1 Month Libor | April 2010 | |
$ 25,000 | 2.94% | 1 Month Libor | October 2010 |
We entered into the interest rate swaps in order to manage the risk of interest rate changes to our interest expense. The interest rate swaps are designated as cash flow hedges; the notional amounts and all other significant terms of the swap agreement are matched to the provisions and terms of the variable rate debt hedged. The fair market of the three hedges is recorded as a liability of $4.1 million. At March 31, 2009, the hedges were determined to be 100% effective. Gains or losses on hedges are reclassified into interest expense when the effect of the hedged item is recognized in earnings. The fair market value was determined using market data inputs to calculate expected future interest rates. The cash streams attributable to the difference between expected future rates and the fixed rate of 5.64% per annum. Interestpayable is payable in arrears semi-annually on April 15 and October 15 beginning on October 15, 2008, and principal is payablediscounted to arrive at the maturityfair value of the notes on April 15, 2015.three hedges.
The Notes are unsecured obligations and rank pari passu with our obligations under our senior unsecured credit facility pursuant to our credit agreement with Bank of America, N.A. and the other lenders party to the credit agreement. We applied the proceeds from the sale of the Notes to reduce our borrowings under our senior unsecured credit facility. The Notes contain customary events of default, including our failure to pay any principal, interest or other amount when due, our violation of our affirmative or negative covenants or a breach of our representations and warranties. Upon the occurrence of an event of default, payment of the Notes may be accelerated by the holders of the notes.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We were incorporated in 1989 and presently serve a very diverse customer base of approximately 397,200420,000 customers throughout the United States, United Kingdom, Canada, Mexico, Canada, Ireland, Argentina, Chile and Puerto Rico. 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 regulated medical waste management services and regulated return management services. Regulated medical waste management services include servicing a variety of customers to remove and process waste while regulated return management services are physical services provided to companies and individual businesses that assist with the handling of products that are being removed from the supply chain due to recalls and expiration.
12
These services also include advanced notification technology that is used to communic atecommunicate specific instructions to the users of the product. Our waste treatment technologies include autoclaving, incineration, chemical treatment and our proprietary electro-thermal-deactivation system. In addition, we have technology licensing agreements with companies located in Japan, Brazil, and South Africa.
Other than the adoption of SFAS No. 157141 (R) Business Combinations, (see Note-13 Fair Value Measurements)Note 11 – New Accounting Standards, for the impact on the financial statements), there were no material changes in the Company’s critical accounting policies since the filing of its 20072008 Form 10-K. As discussed in the 20072008 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
12
statements and revenues and expenses during the periods reported. Actual results may differ from those estimates.
THREE MONTHS ENDED MARCH 31, 20082009 COMPARED TO THREE MONTHS ENDED MARCH 31, 20072008
The following summarizes the Company’s operations:
In thousands, except per share data | In thousands, except per share data | In thousands, except per share data | ||||||||||||||||||||
|
| Three Months Ended March 31, |
| Three Months Ended March 31, | ||||||||||||||||||
|
| 2008 |
|
| 2007 |
| 2009 |
|
| 2008 | ||||||||||||
|
| $ |
|
| % |
|
| $ |
|
| % |
| $ |
|
| % |
|
| $ |
| % | |
Revenues | $ | 254,784 |
|
| 100.0 |
| $ | 211,049 |
|
| 100.0 | $ | 277,090 |
|
| 100.0 |
| $ | 254,784 |
| 100.0 | |
Cost of revenues |
| 141,194 |
|
| 55.4 |
|
| 116,813 |
|
| 55.3 |
| 149,287 |
|
| 53.9 |
|
| 141,194 |
| 55.4 | |
Gross profit |
| 113,590 |
|
| 44.6 |
|
| 94,236 |
|
| 44.7 |
| 127,803 |
|
| 46.1 |
|
| 113,590 |
| 44.6 | |
Selling, general and administrative expenses |
| 48,750 |
|
| 19.1 |
|
| 38,960 |
|
| 18.5 |
| 52,993 |
|
| 19.1 |
|
| 48,750 |
| 19.1 | |
Gain on sale of assets |
| -- |
|
| -- |
|
| (823) |
|
| (0.4) | |||||||||||
Impairment of fixed assets |
| -- |
|
| -- |
|
| 650 |
|
| 0.3 | |||||||||||
Arbitration settlement and related costs |
| 5,352 |
|
| 2.1 |
|
| -- |
|
| -- | |||||||||||
Arbitration settlement and related expenses |
| -- |
|
| -- |
|
| 5,352 |
| 2.1 | ||||||||||||
Acquisition related transaction expenses |
| 610 |
|
| 0.2 |
|
| -- |
| -- | ||||||||||||
Income from operations |
| 59,488 |
|
| 23.3 |
|
| 55,449 |
|
| 26.3 |
| 74,200 |
|
| 26.8 |
|
| 59,488 |
| 23.3 | |
Net interest expense |
| 7,726 |
|
| 3.0 |
|
| 7,299 |
|
| 3.5 |
| 7,925 |
|
| 2.9 |
|
| 7,726 |
| 3.0 | |
Income tax expense |
| 19,655 |
|
| 7.7 |
|
| 18,710 |
|
| 8.9 |
| 24,811 |
|
| 9.0 |
|
| 19,655 |
| 7.7 | |
Net income | $ | 31,664 |
|
| 12.4 |
| $ | 29,387 |
|
| 13.9 | $ | 40,655 |
|
| 14.7 |
| $ | 31,664 |
| 12.4 | |
Earnings per share- diluted | $ | 0.35 |
|
|
|
| $ | 0.32 |
|
|
| $ | 0.47 |
|
|
|
| $ | 0.35 |
|
|
Revenues: Our revenues increased $43.7$22.3 million, or 20.7%8.8%, to $277.1 million in 2009 from $254.8 million in 2008 from $211.0 million in 2007.2008. Domestic revenues increased $31.2$27.8 million or 19.1%,14.3% to $222.0 million from $194.3 million from $163.1 million in 20072008 as internal revenue growth for domestic small account customers increased by approximately $12.4$10.9 million, or 13.6%10%, and internal revenue growth for large quantity customers increased by approximately $5.3$4.0 million, or 9.5%6%. Internal revenue growth for returns management was $0.9decreased by $2.0 million, and domestic acquisitions less than one year old contributed approximately $12.6$14.9 million to the increase in domestic revenues.
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International revenues increased $12.5decreased $5.4 million to $55.1 million, or 9.0%, from $60.5 million or 26.1%, from $47.9 million in 2007.2008. Internal growth in the international segment contributed $5.3$5.9 million, or 11.6%10% to the increase in increasedinternational revenues, before taking into consideration the effect of exchange rates acquisitions, and divestitures.acquisitions. The effect of exchange rate fluctuations favorablyunfavorably impacted international revenues approximately $2.3$16.1 million while acquisitions less than one year old contributed an additional $6.8$4.8 million in international revenues. The divestiture of selected STG plants in the first quarter of 2007 negatively impacted the comparison to 2008 by $1.9 million.
Cost of Revenues: Our cost of revenues increased $24.4$8.1 million, or 20.9%5.7%, to $149.3 million during 2009 from $141.2 million during 2008 from $116.8 million during 2007.2008. Our domestic cost of revenues increased $16.9$12.5 million, or 20.1%12.3%, to $113.8 million from $101.3 million from $84.4 million in 2007
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2008 as a result of costs related to a proportional increase in revenues from acquisitions and internal growth. Our international cost of revenues increased $7.5decreased $4.4 million, or 23.0%11.0% to $35.5 million from $39.9 million from $32.4 million in 20072008 as a result of costs related to proportional increasedecrease in revenues from acquisitions and internal revenue growth.primarily driven by the impact of exchange rates. Our company wide gross margin percentage slightly decreasedincreased to 46.1% during 2009 from 44.6% during 2008 from 44.7% during 2007 due to an increasea decrease in fuel and energy costs.
Selling, General and Administrative Expenses: Selling, general and administrative expenses, including acquisition related costs, increased $9.8$4.2 million, or 25.1%8.7%, to $48.8$53.0 million, for the quarter ended March 31, 20082009 from $39.0$48.8 million for the comparable quarter in 2007.2008. As a percentage of revenue, these costs increased by 0.6%were flat for the quarter ended March 31, 20082009 compared to the same period in 2007 with 0.5% of the increase related to overhead expenses. The increase was primarily due to higher revenues from acquisitions and the related higher SG&A expenses.2008.
Income from Operations: Income from operations increased to $59.5$74.2 million for the quarter ended March 31, 20082009 from $55.4$59.5 million for the comparable quarter in 2007,2008, an increase of 7.3%24.7%. During 2008, we recognizedThis increase is partially attributed to a business dispute settlement and related costs of $5.4 million. Duringthat were recognized during the quarter ended March 31, 2007 we recognized a gain on sale2008 of assets of $0.8$5.4 million, offset by $0.7 million in idled assets write-offs, $0.2 million of which were related to disposal of an incinerator in Mexico.did not repeat during 2009.
Net Interest Expense: Net interest expense slightly increased to $7.7$7.9 million during the quarter ended March 31, 20082009 from $7.3$7.7 million during the comparable quarter in 20072008 due to increased borrowings related to stock repurchases and acquisitions.partially offset by lower interest rates.
Income Tax Expense: Income tax expense increased to $19.7$24.8 million for the quarter ended March 31, 20082009 from $18.7$19.7 million for the comparable quarter in 2007.2008. The increase was due to higher taxable income. The effective tax rates for the quarters ended March 31, 2009 and 2008 were 37.9% and 2007 were 38.3% and 38.9%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our senior credit facility of $850.0 million maturing in August 2012 requires us to comply with various financial, reporting and other covenants and restrictions, including a restriction on dividend payments. At March 31, 2008,2009, we were in compliance with all of our financial debt covenants. At March 31, 20082009 the margin for interest rates on borrowings under our new credit facility was 0.0% on base rate loans (at higher of (i) the federal funds rate plus 0.5% or (ii) the prime rate) and 0.75% on LIBOR loans.
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As of March 31, 2008,2009, we had $495.1$415 million of borrowings outstanding under our senior unsecured credit facility, which includes foreign currency borrowings of $12.5$5 million. In addition, we had $144.8$208 million committed to outstanding letters of credit. The weighted average rate of interest on the unsecured revolving credit facility was 3.53%1.30% per annum. At March 31, 20082009 we had $177.2$349 million in other debt outstanding, which includes promissory notes issued in connection with acquisitions during 2004 through 2008,2009, other foreign subsidiary bank debt and $1.6 million in capital leases.
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On April 15, 2008, we entered into a note purchase agreement (the “note purchase agreement”) with nine institutional purchasers pursuant to which we issued and sold to the purchasers $100,000,000 of our 5.64% senior notes due April 15, 2015 (the “notes”). The notes bear interest at the fixed rate of 5.64% per annum. Interest is payable in arrears semi-annually on April 15 and October 15 beginning on October 15, 2008,2009, and principal is payable at the maturity of the notes on April 15, 2015.
The notes are unsecured obligations and rank pari passu with our obligations under our senior unsecured credit facility pursuant to our credit agreement with Bank of America, N.A. and the other lenders party to the credit agreement. We applied the proceeds from the sale of the notes to reduce our borrowings under our revolving credit facility under our senior unsecured credit facility. The notes contain customary events of default, including our failure to pay any principal, interest or other amount when due, our violation of our affirmative or negative covenants or a breach of our representations and warranties. Upon the occurrence of an event of default, payment of the notes may be accelerated by the holders of the notes.
Working Capital: At March 31, 2008,2009, our working capital decreased $15.1$8.3 million to $45.5$36.5 million compared to $60.6$44.8 million at December 31, 2007.2008. Of the decrease in working capital, $14.3$9.9 million relatedrelates to a decrease in accounts receivable from an increase in collections. Total accrued liabilities decreased approximately $2.5 million (which is an increase to working capital) with large offsetting movements related to an acquisition payment of $12.0 million that was accrued for in December while accrued income tax payable relatedtaxes increased by $14.5 million due to the timing of tax payments. An additional $4.8 million decrease is attributable to additional accrued amounts related to the Daniels settlement discussed in Note 10 – Legal Proceedings. Our deferred revenues increased $4.1 million which is primarily related to prepayments on customer contracts in the United Kingdom. Partially offsetting those decreases to working capital was a decrease in our accounts payable of $12.2 million that was due to the timing of vendor payments.
Net Cash Provided or Used: Net cash provided by operating activities increased $10.7$12.7 million, or 20.3%19.9%, to $63.6$76.3 million during the quarter ended March 31, 20082009 compared to $52.9$63.6 million for the comparable period in 2007.2008. The increase in operating cash was primarily due to higher earnings and increased collections on higher revenues, which increased 20.7%.receivables.
Net cash used in investing activities for the quarter ended March 31, 20082009 was $18.0$26.1 million compared to net cash providedused of $2.2$18.0 million in the comparable period in 2007.2008. The difference is mainly due to $26.5$16.3 million received frompaid for acquisitions and international investments in 2009, compared to $7.8 million for the divestiture of selected plantssame period in the United Kingdom completed in February 2007,prior year partially offset by $6.9lower capital expenditures which decreased during the current period by $2.9 million less paid for acquisitions in 2008.
At March 31, 2008 we had approximately 9% of our treatment capacity in North America in incineration and approximately 91% in non-incineration technologies, such as autoclaving, and our proprietary patented ETD technology. The implementation of our commitmentwhen compared to move away from incineration in North America may result in a write-downsame period of the incineration equipment as and when we close incinerators that we are currently operating. The net book value of our North American incinerators is approximately $6.9 million, or 0.4% of our total assets. Our commitment to move away from incineration in North America is in the nature of a goal to be accomplished over an undetermined number of years. Because of uncertainties relating, among other things, to customer education and acceptance and legal requirements to incinerate portions of the
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medical waste, we do not have a timetable for this transition or specific plans to close any of our existing incinerators.prior year.
Net cash used in financing activities was $48.0$52.0 million during the quarter ended March 31, 20082009 compared to $47.9$48.0 million for the comparable period in 2007. An increase2008.
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A decrease of $33.3$51.9 million for the repurchase and cancellation of common stock over the prior year period was offset by a $15.9$57.0 million decrease inincrease for repayment of long-term debt and an $18.4 million increase of borrowings under our senior unsecured credit facility.debt.
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 their medical waste management business and has a six month loan with a current balance of $4.8$5.1 million with JPMorganChase Bank N.A. that expires in May 2008.2009. The loan with JPMorganChase and our associated guarantee will beis in the process of being extended untilbeyond May 2009.2010.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risks arising from changes in interest rates. In 2008, we entered into three interest rate derivative transactions that effectively fix the interest rate on the applicable notional amounts of our variable rate debt as follows:
In thousands | ||||
Notional | Fixed | Variable | Expiration | |
Amount | Interest Rate | Interest Rate | Date | |
$ 125,000 | 2.79% | 1 Month Libor | October 2009 | |
$ 75,000 | 2.79% | 1 Month Libor | April 2010 | |
$ 25,000 | 2.94% | 1 Month Libor | October 2010 |
The interest rate swaps are designated as cash flow hedges; the notional amounts and all other significant terms of the swap agreement are matched to the provisions and terms of the variable rate debt hedged. We apply hedge accounting to account for these instruments.
Our potential additional interest expense over one year that would result from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate on all of our variable rate obligations would be approximately $5.3$4.5 million on a pre-tax basis.
We have exposure to currency exchange rate fluctuations between the U.S. dollar and U.K. pound sterling (“GBP”) related to an 11eight million GBP inter-companyintercompany loan to Stericycle International, Ltd., the parent company of White Rose Environmental. We use cash flow hedge accounting treatment on our forward contracts. TheBoth the intercompany loan balance and the forward contracts are marked to market at the end of each reporting period and the impact on the balances is recorded on the balance sheet to accumulated other comprehensive income.
We have exposure to commodity pricing for gas and diesel fuel for our trucks and for the purchase of containers and boxes. We do not hedge these items to manage the exposure.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our President and Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter covered by this Report. On the basis of this evaluation, our President and Chief Executive Officer and our Chief Financial Officer each concluded that our disclosure controls and procedures were effective.
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The term “disclosure controls and procedures” is defined in Rule 13a-14(e) of the Securities Exchange Act of 1934 as “controls and other procedures designed to ensure that information required to be disclosed by the issuer in the reports, files or submits under the Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.” Our disclosure controls and procedures are designed to ensure that material information relating to us and our consolidated subsidiaries is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding our required disclosures.
Internal Control Over Financial Reporting
During the quarter ended March 31, 2008,2009, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely materially to affect, our internal controls over financial reporting.
FROM TIME TO TIME WE ISSUE FORWARD-LOOKING STATEMENTS RELATING TO SUCH THINGS AS ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, ACQUISITION ACTIVITIES AND SIMILAR MATTERS.
THESE FORWARD-LOOKING STATEMENTS MAY INVOLVE RISKS AND UNCERTAINTIES, SOME OF WHICH ARE BEYOND OUR CONTROL (FOR EXAMPLE, GENERAL ECONOMIC CONDITIONS). OUR ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THE RESULTS DESCRIBED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE SUCH DIFFERENCES INCLUDE DIFFICULTIES IN COMPLETING THE INTEGRATION OF ACQUIRED BUSINESSES, CHANGES IN GOVERNMENTAL REGULATION OF MEDICAL WASTE COLLECTION AND TREATMENT, AND INCREASES IN TRANSPORTATION AND OTHER OPERATING COSTS, AS WELL AS VARIOUS OTHER FACTORS.
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PART II. – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 10, Legal Proceedings, in the Notes to the Condensed Consolidated Financial Statements (Item 1 of Part I).
ITEM 2. CHANGES IN SECURITIES, USES OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
·
In May 2002Under resolutions that our Board of Directors adopted in May 2002, February 2005, February 2007, May 2007 and May 2008, we have been authorized the Company to repurchase up to 6,000,000purchase a cumulative total of 16,224,578 shares of our common stock inon the open market or through privately negotiated transactions, at times and in amounts in the Company’s discretion.
·
In February 2005, at a time whenmarket. As of March 31, 2009, we had purchased a cumulative total of 2,956,860 shares, the Board authorized us to purchase an additional 2,956,86012,204,116 shares.
·
In February 2007, at a time when we had purchased an additional 3,142,080 shares since the prior increase in authorization, the Board authorized us to purchase up to an additional 3,142,080 shares.
·
In May 2007, at a time when we had purchased an additional 1,187,142 shares since the prior increase in authorization, the Board authorized us to purchase up to an additional 1,187,142 shares, thereby again giving the Company the authority to purchase up to a total of 6,000,000 additional shares.
The following table provides information about our purchases during the three months ended March 31, 20082009 of shares of our common stock.
Issuer Purchase of Equity Securities
Period |
| Total Number of Share (or Units) Purchased |
|
| Average Price Paid per Share (or Unit) |
| Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
| Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
January 1- January 31, 2008 |
| 198,218 |
| $ | 54.91 |
| 198,218 |
| 4,600,653 |
February 1- February 29, 2008 |
| 891,224 |
|
| 54.10 |
| 891,224 |
| 3,709,429 |
March 1- March 31, 2008 |
| 392,743 |
|
| 51.65 |
| 392,743 |
| 3,316,686 |
Period |
| Total Number of Share (or Units) Purchased |
|
| Average Price Paid per Share (or Unit) |
| Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
| Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
January 1- January 31, 2009 |
| 340,965 |
| $ | 48.11 |
| 340,965 |
| 4,215,843 |
February 1- February 28, 2009 |
| 143,998 |
|
| 46.59 |
| 143,998 |
| 4,071,845 |
March 1- March 31, 2009 |
| 51,383 |
|
| 46.89 |
| 51,383 |
| 4,020,462 |
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ITEM 6. EXHIBITS
31.1
Rules 13a-14(a)/15d-14(a) Certification of Mark C. Miller, Chairman, President and Chief Executive Officer
31.2
Rule 13a-14(a)/15d-14(a) Certification of Frank J.M. ten Brink, Executive Vice President and Chief Financial Officer
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Section 1350 Certification of Mark C. Miller, Chairman, President and Chief Executive Officer, and Frank J.M. ten Brink, Executive Vice President and Chief Financial Officer
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.
Dated: May 8, 20087, 2009
| STERICYCLE, INC. | |
| (Registrant) | |
| By: | /s/ Frank J.M. ten Brink |
| Frank J.M. ten Brink | |
| Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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