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, 20092010 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 registrant 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 smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
As of May 4, 2009April 30, 2010 there were84,881,189 84,628,499 shares of the registrant'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 |
Condensed Consolidated Statements of Changes in Equity | |||
for the three months ended March 31, 2010 (Unaudited) and December 31, 2009 (Audited) | 4 | ||
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| Notes to Condensed Consolidated Financial Statements (Unaudited) |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Qualitative and Quantitative Disclosures about Market Risk |
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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 |
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Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
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Item 6. Exhibits |
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Signature |
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Certifications |
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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, | ||
|
| 2009 |
| 2008 |
| 2010 |
| 2009 | ||
|
| (Unaudited) |
| (Audited) |
| (Unaudited) |
| (Audited) | ||
ASSETS |
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Current Assets: |
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Cash and cash equivalents | $ | 9,096 |
| $ | 9,095 | $ | 22,886 |
| $ | 15,767 |
Short-term investments |
| 3,036 |
| 1,408 |
| 1,786 |
| 1,131 | ||
Accounts receivable, less allowance for doubtful accounts of $6,757 in 2009 and $6,616 in 2008 |
| 158,696 |
| 168,598 | ||||||
Accounts receivable, less allowance for doubtful accounts of $9,370 in 2010 and $8,709 in 2009 |
| 192,296 |
| 179,770 | ||||||
Deferred income taxes |
| 11,436 |
| 16,821 |
| 9,746 |
| 14,087 | ||
Prepaid expenses and other current assets |
| 28,981 |
|
| 28,508 | |||||
Prepaid expenses |
| 19,296 |
| 12,421 | ||||||
Other current assets |
| 25,804 |
| 23,364 | ||||||
Total Current Assets |
| 211,245 |
| 224,430 |
| 271,814 |
| 246,540 | ||
Property, Plant and Equipment, net |
| 207,985 |
| 207,144 |
| 253,830 |
| 246,154 | ||
Other Assets: |
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Goodwill |
| 1,136,874 |
| 1,135,778 |
| 1,428,348 |
| 1,394,091 | ||
Intangible assets, less accumulated amortization of $14,047 in 2009 and $14,116 in 2008 |
| 171,172 |
| 170,624 | ||||||
Intangible assets, less accumulated amortization of $20,364 in 2010 and $18,546 in 2009 |
| 304,783 |
| 269,454 | ||||||
Other |
| 21,937 |
| 21,322 |
| 28,236 |
| 26,564 | ||
Total Other Assets |
| 1,329,983 |
| 1,327,724 |
| 1,761,367 |
| 1,690,109 | ||
Total Assets | $ | 1,749,213 |
| $ | 1,759,298 | $ | 2,287,011 |
| $ | 2,182,803 |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Current portion of long-term debt | $ | 39,594 |
| $ | 38,880 | $ | 67,680 |
| $ | 65,932 |
Accounts payable |
| 29,475 |
| 33,612 |
| 45,922 |
| 47,608 | ||
Accrued liabilities |
| 90,967 |
| 93,487 |
| 113,824 |
| 92,226 | ||
Deferred revenue |
| 14,719 |
| 13,663 | ||||||
Deferred revenues |
| 16,377 |
| 14,954 | ||||||
Total Current Liabilities |
| 174,755 |
| 179,642 |
| 243,803 |
| 220,720 | ||
Long-term debt, net of current portion |
| 723,999 |
| 753,846 |
| 929,039 |
| 922,919 | ||
Deferred income taxes |
| 152,494 |
| 147,287 |
| 187,797 |
| 171,744 | ||
Other liabilities |
| 9,391 |
| 8,043 |
| 14,482 |
| 10,247 | ||
Shareholders' Equity: |
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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 | ||||||
Common stock (par value $.01 per share, 120,000,000
shares authorized, 84,652,064 issued and outstanding
in 2010 and 84,715,005 issued and outstanding in 2009) |
| 847 |
| 847 | ||||||
Additional paid-in capital |
| 50,188 |
| 67,776 |
| 46,290 |
| 47,522 | ||
Accumulated other comprehensive loss |
| (37,045) |
| (32,075) | ||||||
Accumulated other comprehensive income |
| (22,562) |
| (12,292) | ||||||
Retained earnings |
| 674,582 |
| 633,927 |
| 857,737 |
| 809,618 | ||
Total Stericycle, Inc. Shareholders’ Equity |
| 882,312 |
| 845,695 | ||||||
Noncontrolling interest |
| 29,578 |
| 11,478 | ||||||
Total Shareholders' Equity |
| 688,574 |
| 670,480 |
| 911,890 |
| 857,173 | ||
Total Liabilities and Shareholders' Equity | $ | 1,749,213 |
| $ | 1,759,298 | $ | 2,287,011 |
| $ | 2,182,803 |
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 | ||||||||
|
| Three Months Ended March 31, |
| Three Months Ended March 31, | ||||||
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| 2009 |
| 2008 |
| 2010 |
| 2009 | ||
Revenues | $ | 277,090 |
| $ | 254,784 | $ | 335,177 |
| $ | 277,090 |
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Costs and Expenses: |
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Cost of revenues |
| 142,594 |
| 135,121 |
| 170,570 |
| 142,594 | ||
Selling, general and administrative expenses |
| 50,731 |
| 45,765 |
| 62,470 |
| 50,731 | ||
Depreciation and amortization |
| 8,844 |
| 8,345 |
| 12,389 |
| 8,844 | ||
Arbitration settlement and related expenses |
| -- |
| 5,352 | ||||||
Restructuring costs |
| 667 |
| -- | ||||||
Acquisition related transaction expenses |
| 610 |
| -- |
| 800 |
| 610 | ||
Acquisition integration expenses |
| 111 |
| 713 |
| 1,149 |
| 111 | ||
Total Costs and Expenses |
| 202,890 |
| 195,296 |
| 248,045 |
| 202,890 | ||
Income from Operations |
| 74,200 |
| 59,488 |
| 87,132 |
| 74,200 | ||
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Other Income (Expense): |
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Interest income |
| 174 |
| 402 |
| 80 |
| 174 | ||
Interest expense |
| (8,099) |
| (8,128) |
| (8,963) |
| (8,099) | ||
Other expense, net |
| (809) |
| (443) |
| (1,003) |
| (790) | ||
Total Other Expense |
| (8,734) |
| (8,169) |
| (9,886) |
| (8,715) | ||
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Income Before Income Taxes |
| 65,466 |
| 51,319 |
| 77,246 |
| 65,485 | ||
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Income Tax Expense |
| 24,811 |
| 19,655 |
| 28,612 |
| 24,811 | ||
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Net Income | $ | 40,655 |
| $ | 31,664 | $ | 48,634 |
| $ | 40,674 |
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Net Income attributable to noncontrolling interests |
| 515 |
| 19 | ||||||
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Net Income attributable to Stericycle, Inc. | $ | 48,119 |
| $ | 40,655 | |||||
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Earnings Per Common Share: |
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Basic | $ | 0.48 |
| $ | 0.36 | $ | 0.57 |
| $ | 0.48 |
Diluted | $ | 0.47 |
| $ | 0.35 | $ | 0.56 |
| $ | 0.47 |
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Weighted Average Number of Common Shares Outstanding: |
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Basic |
| 84,908,733 |
| 86,845,150 |
| 84,766,721 |
| 84,908,733 | ||
Diluted |
| 86,841,903 |
| 89,393,242 |
| 86,573,237 |
| 86,841,903 |
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, | ||||||
|
| 2009 |
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| 2008 |
| 2010 |
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| 2009 |
OPERATING ACTIVITIES: |
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Net income | $ | 40,655 |
| $ | 31,664 | $ | 48,634 |
| $ | 40,674 |
Adjustments to reconcile net income to net cash provided by operating activities: |
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Loss on sale of fixed assets |
| 22 |
|
| -- | |||||
Write-off of note receivable related to joint venture |
| -- |
|
| 798 | |||||
Stock compensation expense |
| 3,461 |
|
| 3,064 |
| 3,874 |
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| 3,461 |
Excess tax (expense)/ benefit from exercise of stock options |
| (264) |
|
| 23 | |||||
Excess tax benefit stock options exercised |
| (1,163) |
|
| (264) | |||||
Depreciation |
| 7,834 |
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| 7,293 |
| 10,414 |
|
| 7,834 |
Amortization |
| 1,010 |
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| 1,052 |
| 1,975 |
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| 1,010 |
Deferred income taxes |
| 7,858 |
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| 8,916 |
| 13,784 |
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| 7,858 |
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: |
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Accounts receivable |
| 7,882 |
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| (2,347) |
| (7,932) |
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| 7,882 |
Accounts payable |
| (3,715) |
|
| (14,309) |
| (3,522) |
|
| (3,715) |
Accrued liabilities |
| 13,527 |
|
| 22,793 |
| 15,601 |
|
| 13,527 |
Deferred revenue |
| 1,096 |
|
| 4,104 |
| 1,611 |
|
| 1,096 |
Other assets |
| (3,090) |
|
| 551 | |||||
Other assets and liabilities |
| (2,221) |
|
| (3,087) | |||||
Net cash provided by operating activities |
| 76,276 |
|
| 63,602 |
| 81,055 |
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| 76,276 |
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INVESTING ACTIVITIES: |
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Payments for acquisitions and international investments, net of cash acquired | �� | (16,296) |
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| (7,776) |
| (50,459) |
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| (16,296) |
(Purchase of)/ proceeds from maturity of short-term investments |
| (1,664) |
|
| 1,078 | |||||
Purchase of short-term investments |
| (423) |
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| (1,664) | |||||
Proceeds from sale of property and equipment |
| 244 |
|
| -- |
| -- |
|
| 244 |
Capital expenditures |
| (8,389) |
|
| (11,299) |
| (12,804) |
|
| (8,389) |
Net cash used in by investing activities |
| (26,105) |
|
| (17,997) |
| (63,686) |
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| (26,105) |
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FINANCING ACTIVITIES: |
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Repayment of long-term debt |
| (2,908) |
|
| (340) |
| (27,533) |
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| (2,908) |
(Repayments)/ borrowing on senior credit facility |
| (25,112) |
|
| 29,326 | |||||
Repurchase and cancellation of common stock |
| (27,482) |
|
| (79,384) | |||||
Net borrowings / (repayments) on senior credit facility |
| 24,873 |
|
| (25,112) | |||||
Purchase / cancellation of treasury stock |
| (10,616) |
|
| (27,482) | |||||
Proceeds from issuance of common stock |
| 3,229 |
|
| 2,397 |
| 4,195 |
|
| 3,229 |
Excess tax expense/ (benefit) from exercise of stock options |
| 264 |
|
| (23) | |||||
Excess tax benefit stock options exercised |
| 1,163 |
|
| 264 | |||||
Net cash used in by financing activities |
| (52,009) |
|
| (48,024) |
| (7,918) |
|
| (52,009) |
Effect of exchange rate changes on cash |
| 1,839 |
|
| (3,484) |
| (2,332) |
|
| 1,839 |
Net increase/ (decrease) in cash and cash equivalents |
| 1 |
|
| (5,903) | |||||
Net increase in cash and cash equivalents |
| 7,119 |
|
| 1 | |||||
Cash and cash equivalents at beginning of period |
| 9,095 |
|
| 17,108 |
| 15,767 |
|
| 9,095 |
Cash and cash equivalents at end of period | $ | 9,096 |
| $ | 11,205 | $ | 22,886 |
| $ | 9,096 |
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NON-CASH ACTIVITIES: |
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Net issuance of notes payable for certain acquisitions | $ | 1,900 |
| $ | 7,044 | $ | 10,038 |
| $ | 1,900 |
The accompanying notes are an integral part of these financial statements.
3
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
March 31, 2010 (Unaudited) and
Year Ended December 31, 2009 (Audited)
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| In thousands | ||||||||||||||||
| Stericycle, Inc. Equity |
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| Issued and Outstanding Shares |
| Common Stock |
| Additional Paid-In Capital |
| Retained Earnings |
| Accumulated Other Comprehensive Income (Loss) |
| Non-Controlling Interest |
| Total Equity | |||||
Balance at December 31, 2008 | 85,253 |
| $ 852 |
| $ 67,776 |
| $ 633,927 |
| $ (32,075) |
| $ 158 |
| $ 670,638 | |||||
Issuance of common stock for exercise of options and employee stock purchases | 1,132 |
| 12 |
| 15,889 |
| -- |
| -- |
| -- |
| 15,901 | |||||
Purchase/ Cancellation of treasury stock | (1,670) |
| (17) |
| (73,164) |
| -- |
| -- |
| -- |
| (73,181) | |||||
Stock compensation expense | -- |
| -- |
| 14,638 |
| -- |
| -- |
| -- |
| 14,638 | |||||
Excess tax benefit of disqualifying dispositions of stock options and exercise of non-qualified stock options | -- |
| -- |
| 22,383 |
| -- |
| -- |
| -- |
| 22,383 | |||||
Change in noncontrolling interest | -- |
| -- |
| -- |
| -- |
| -- |
| 9,787 |
| 9,787 | |||||
Currency translation adjustment | -- |
| -- |
| -- |
| -- |
| 17,595 |
| 835 |
| 18,430 | |||||
Change in fair value of cash flow hedge, net of tax of $454 | -- |
| -- |
| -- |
| -- |
| 2,188 |
| -- |
| 2,188 | |||||
Net income | -- |
| -- |
| -- |
| 175,691 |
| -- |
| 698 |
| 176,389 | |||||
Comprehensive income |
|
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|
|
|
|
|
|
|
|
| 197,007 | |||||
Balance at December 31, 2009 | 84,715 |
| $ 847 |
| $ 47,522 |
| $ 809,618 |
| $ (12,292) |
| $ 11,478 |
| $ 857,173 | |||||
Issuance of common stock for exercise of options and employee stock purchases | 155 |
| 2 |
| 5,541 |
| -- |
| -- |
| -- |
| 5,543 | |||||
Purchase/ Cancellation of treasury stock | (218) |
| (2) |
| (11,810) |
| -- |
| -- |
| -- |
| (11,812) | |||||
Stock compensation expense | -- |
| -- |
| 3,874 |
| -- |
| -- |
| -- |
| 3,874 | |||||
Excess tax benefit of disqualifying dispositions of stock options and exercise of non-qualified stock options | -- |
| -- |
| 1,163 |
| -- |
| -- |
| -- |
| 1,163 | |||||
Noncontrolling interest in equity acquired | -- |
| -- |
| -- |
| -- |
| -- |
| 17,349 |
| 17,349 | |||||
Currency translation adjustment | -- |
| -- |
| -- |
| -- |
| (10,641) |
| 236 |
| (10,405) | |||||
Change in fair value of cash flow hedge, net of tax of $217 | -- |
| -- |
| -- |
| -- |
| 371 |
| -- |
| 371 | |||||
Net income | -- |
| -- |
| -- |
| 48,119 |
| -- |
| 515 |
| 48,634 | |||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
| 38,600 | |||||
Balance at March 31, 2010 | 84,652 |
| $ 847 |
| $ 46,290 |
| $ 857,737 |
| $ (22,562) |
| $ 29,578 |
| $ 911,890 |
The accompanying notes are an integral part of these financial statements.
4
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, 2008,2009, as filed wit hwith our Annual Report on Form 10-K for the year ended December 31, 2008.2009. The results of operations for the three months ended March 31, 20092010 are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2009.2010.
NOTE 2 – ACQUISITIONS AND DIVESTITURES
During the quarter ended March 31, 2009,2010, we acquired selected assets of threetwo domestic medicalregulated waste businesses, 100% of the stock of two regulated waste businesses in the UK, 70% of the stock of a regulated waste business in Brazil, and completed100% of the funding onstock of a 2008 acquisition.regulated waste business in Chile. We also increased our majority share in a previous acquisition in Chile.
.
The aggregate purchase price of our acquisitions during the quarter ended March 31, 20092010, was approximately $18.2$66.9 million, of which approximately $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$50.4 million was paid in cash, and $1.9$10.0 million was paid by the issuance of promissory notes.notes, and $6.5 million was recorded as part of contingent consideration. For financial reporting purposes, our 20092010 acquisitions were accounted for using the acquisition method of accounting. The purchase prices of these acquisitions, in excess of acquired tangible assets, have been primarily allocated to goodwill and other intangibles and are preliminary pending completion of certain intangible asset valuations.
5
In thousands | |||||||||
|
| Acquired During 2010 |
|
| Prior Period Adjustments |
|
| Total Allocations | |
Fixed assets | $ | 8,125 |
| $ | (1,312) |
| $ | 6,813 | |
Intangibles |
| 39,701 |
|
| 384 |
|
| 40,085 | |
Goodwill |
| 46,250 |
|
| (2,461) |
|
| 43,789 | |
Net other assets |
| 3,573 |
|
| 224 |
|
| 3,797 | |
Debt |
| (4,079) |
|
| 1,514 |
|
| (2,565) | |
Net deferred tax liabilities |
| (9,366) |
|
| 1,757 |
|
| (7,609) | |
Noncontrolling interests |
| (17,349) |
|
| -- |
|
| (17,349) | |
| $ | 66,855 |
| $ | 106 |
| $ | 66,961 |
The results of operations of these acquired businesses have been included in the consolidated statements of income from the dates of acq uisition.acquisition. These acquisitions resulted in recognition of goodwill in our financial statements reflecting the complementary strategic fit that the acquired businesses brought to us.
4
NOTE 3 – INCOME TAXES
Our acquisition of MedServe in December of 2009 required us to divest of certain acquired assets. We have assigned a value of $4.2 million to these assets, made up primarily of fixed assets and our subsidiaries file U.S. federal income tax returns and income tax returns in various states and foreign jurisdictions. With a few exceptions, wegoodwill, which are no longer subject to U.S. federal, state, local, or non-U.S. income tax examinations by tax authorities for years before 2002. The Internal Revenue Service (“IRS”) concluded an examinationrecorded as part of the Company's U.S. income tax return for 2004; subsequent tax years remain open and subject to examination by the IRS. Our subsidiaries in foreign countries have tax years open ranging from 2002 through 2008.current assets.
The total amount of unrecognized tax benefits as of March 31, 2009 and 2008 was $8.2 million and $3.7 million, respectively, which included immaterial amounts of interest and penalties reflected as a liability on the balance sheet. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is approximately $8.2 million. 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 changes in unrecognized tax positions during the quarter ended March 31, 2009:
| |||
|
|
| |
|
| ||
|
| ||
|
|
|
NOTE 43 – STOCK BASED COMPENSATIONNEW ACCOUNTING STANDARDS
At March 31, 2009 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;
(iii)
the 2000 Nonstatutory Stock Option Plan, which our Board of Directors adopted in February 2000;
(iv)
the 1997 Stock Option Plan, which expired in January 2008;
(v)
the Directors Stock Option Plan, which expired in May 2006;
(vi)
the 1995 Incentive Compensation Plan, which expired in July 2005;
(vii)
our Employee Stock Purchase Plan, which our stockholders approved in May 2001.Accounting Standards Recently Adopted
The following table sets forthConsolidation
On January 1, 2010, Stericycle adopted changes issued by the expenseFASB related to stock compensation:
In thousands | ||||||
|
| Three Months Ended March 31, | ||||
|
| 2009 |
|
| 2008 | |
Stock options | $ | 3,294 |
| $ | 2,929 |
5amendments to previous guidance on the consolidation of variable interest entities (“VIE”). This standard clarifies the characteristics that identify a VIE and changes how a reporting entity identifies a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards calculation to a qualitative approach based on which variable interest holder has controlling financial interest and the ability to direct the most significant activities that impact the VIE’s economic performance. This statement requires the primary beneficiary assessment to be performed on a continuous basis. It also requires additional disclosures about an entity’s involvement with a VIE, restrictions on the VIE’s assets and liabilities that are included in the reporting entity’s consolidated balance sheet , significant risk exposures due to the entity’s involvement with the VIE, and how its involvement with a VIE impacts the reporting entity’s consolidated financial statements. Our adoption of the standard did not have an impact to our financial statements.
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 | ||||||
|
| Three Months Ended March 31, | ||||
|
| 2009 |
|
| 2008 | |
Tax benefit recognized in income statement | $ | 1,302 |
| $ | 1,211 | |
Excess tax benefit realized |
| 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.Accounting Standards not yet adopted
The assumptions that we used inRevenue Recognition
In October 2009, the Black-Scholes model are as follows:
| Three Months Ended March 31, | |||
| 2009 |
|
| 2008 |
Expected term (in years) | 5.5 |
|
| 5.5 |
Expected volatility | 28.22% |
|
| 26.45% |
Expected dividend yield | 0.00% |
|
| 0.00% |
Risk free interest rate | 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 $13.00, respectively.
Stock option activityFASB issued an update to existing guidance on revenue recognition for the three months ended March 31, 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, 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 was $4.2 million and $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, 2009 (for outstanding options), less the applicable exercise price.arrangements with multiple deliverables. This update will allow
6
Ascompanies to allocate consideration received for qualified separate deliverables using estimated selling price for both delivered and undelivered items when vendor-specific objective evidence or third-party evidence is unavailable. Additional disclosures discussing the nature of March 31, 2009, there was $29.0 millionmultiple element arrangements, the types of total unrecognized compensation expense, relateddeliverables under the arrangements, the general timing of their delivery, and significant factors and estimates used to non-vested stock options, which is expecteddetermine estimated selling prices are required. We will adopt this update for new revenue arrangements entered into or materially modified beginning January 1, 2011. We do not generally have arrangements with multiple deliverables and therefore do not expect any material impact to be recognized over a weighted-average period of 2.09 years.our financial statements upon adoption.
NOTE 5 – COMMON STOCK
During the quarters 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, respectively. The weighted average repurchase price was $47.59 and $53.56 per 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 64 – NET INCOME PER COMMON SHAREFAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following table sets forthfair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the computationbest information available in the circumstances (unobservable inputs). The fair value hierarchy consists of basicthree broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and diluted net income per share:the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
In thousands, except share and per share data | ||||||
|
| Three Months Ended March 31, | ||||
|
| 2009 |
|
| 2008 | |
Numerator: |
|
|
|
|
| |
Numerator for basic earnings per share |
|
|
|
|
| |
Net income | $ | 40,655 |
| $ | 31,664 | |
Denominator: |
|
|
|
|
| |
Denominator for basic earnings per share-weighted average shares |
| 84,908,733 |
|
| 86,845,150 | |
Effect of diluted securities: |
|
|
|
|
| |
Employee stock options |
| 1,933,170 |
|
| 2,546,946 | |
Warrants |
| -- |
|
| 1,146 | |
Dilutive potential shares |
| 1,933,170 |
|
| 2,548,092 | |
Denominator for diluted earnings per share-adjusted weighted average shares and after assumed exercises |
| 86,841,903 |
|
| 89,393,242 | |
|
|
|
|
|
| |
Earnings per share – Basic | $ | 0.48 |
| $ | 0.36 | |
|
|
|
|
|
| |
Earnings per share – Diluted | $ | 0.47 |
| $ | 0.35 |
• | 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. |
NOTE 7 – COMPREHENSIVE INCOME
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 componentsimpact of total comprehensive income are net income,our creditworthiness has been considered in the change in cumulative currency translation adjustments and gains and losses on derivative instruments qualifying as cash flow hedges.The following table sets forthfair value measurements noted below. In addition, the fair value measurement of a liability must reflect the nonperformance risk of an entity.
7
components of total comprehensive income for the three months ended
In thousands | |||||||||||
|
|
|
|
| Fair Value Measurements Using | ||||||
|
| Total as of March 31, 2010 |
|
| Level 1 Inputs |
|
| Level 2 Inputs |
|
| Level 3 Inputs |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ 22,886 |
|
| $ 22,886 |
|
| $ -- |
|
| $ -- |
Short-term investments |
| 1,786 |
|
| 1,786 |
|
| -- |
|
| -- |
Intangible assets |
| 40,149 |
|
| -- |
|
| -- |
|
| 40,149 |
Total assets |
| $ 64,821 |
|
| $ 24,672 |
|
| $ -- |
|
| $ 40,149 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (other accrued liabilities) |
| $ 557 |
|
| $ -- |
|
| $ 557 |
|
| $ -- |
Total liabilities |
| $ 557 |
|
| $ -- |
|
| $ 557 |
|
| $ -- |
In thousands | |||||||||||
|
|
|
|
| Fair Value Measurements Using | ||||||
|
| Total as of December 31, 2009 |
|
| Level 1 Inputs |
|
| Level 2 Inputs |
|
| Level 3 Inputs |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ 15,767 |
|
| $ 15,767 |
|
| $ -- |
|
| $ -- |
Short-term investments |
| 1,131 |
|
| 1,131 |
|
| -- |
|
| -- |
Intangible assets |
| 91,006 |
|
| -- |
|
| -- |
|
| 91,006 |
Total assets |
| $ 107,904 |
|
| $ 16,898 |
|
| $ -- |
|
| $ 91,006 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (other accrued liabilities) |
| $ 1,165 |
|
| $ -- |
|
| $ 1,165 |
|
| $ -- |
Total liabilities |
| $ 1,165 |
|
| $ -- |
|
| $ 1,165 |
|
| $ -- |
Level 1: At March 31, 2010, we have $22.9 million in cash and cash equivalents, and $1.8 million of short-term investments that we carry on our books at fair value using Level 1 inputs. At December 31, 2009, we had $15.8 million in cash and 2008:cash equivalents and $1.1 million of short-term investments on our books at fair value using market price inputs.
In thousands | |||||
|
| Three Months Ended March 31, | |||
|
| 2009 |
|
| 2008 |
Net income | $ | 40,655 |
| $ | 31,664 |
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
Currency translation adjustments |
| (5,343) |
|
| (2,109) |
Change in fair value of derivative instruments |
| 373 |
|
| 239 |
Other comprehensive income |
| (4,970) |
|
| (1,870) |
|
|
|
|
|
|
Total comprehensive income | $ | 35,685 |
| $ | 29,794 |
Level 2: In October 2008, we entered into three interest rate swap contracts, covering $225 million of our borrowings outstanding under our senior credit facility. The objective of the swaps is to reduce the risk of volatile interest expense by fixing the rate. 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 these instruments with changes in the fair value of the swap agreements recorded as a component of other comprehensive income. The fair 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 payable is discounted to arrive at the fair value of the two hedges.
Level 3: As part of our acquisition accounting, we assign fair values to identifiable intangible assets; primarily customer relationships and operating permits. We use a discounted income approach whereby the expected after tax cash flows of the acquired entity are present valued. We use the financial information provided by the
8
NOTE 8 – GUARANTEEacquired company, and management assumptions related to future growth to determine expected future cash flows. We use data provided by unaffiliated external parties as well as internal financial information to calculate a weighted average cost of capital (“WACC”) for the acquired company. The expected cash flows and the calculated WACC are significant inputs in determining the fair value of our intangibles.
We have guaranteedAt March 31, 2010, the fair value of the Company’s debt obligations was estimated at $1.0 billion, compared to a loancarrying amount of $996.7 million. At December 31, 2009, the fair value of the Company’s debt obligations was estimated at $985.0 million, compared to JPMorganChase Bank N.A. on behalfa carrying amount of Shiraishi-Sogyo Co. Ltd (“Shiraishi”). Shiraishi is$988.9 million. This fair value was estimated using market interest rates for comparable instruments. The Company has no current plans to retire a customer in Japan that is expanding their medical waste management business and has a six month loan with a current balancesignificant amount of $5.1 million with JPMorganChase Bank N.A. that expires in May 2009. The loan with JPMorganChase and our associated guarantee is in the processits debt prior to maturity.
There were no movements of being extended beyond May 2010. items between fair value hierarchies.
NOTE 95 – GOODWILLDERIVATIVE INSTRUMENTS
As of March 31, 2010 we have two interest rate swap contracts covering $100 million of our borrowings outstanding under our senior credit facility. The objective of the swap is to reduce the risk of volatile interest expense by fixing the rate. The details of these two contracts are as follows:
In thousands | ||||
Notional | Fixed | Variable | Expiration | |
Amount | Interest Rate | Interest Rate | Date | |
$ 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 two hedges is recorded as a current liability of $0.6 million at March 31, 2010. At March 31, 2010, 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 payable is discounted to arrive at the fair value of the two hedg es.
NOTE 6 – 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 2003. The Internal Revenue Service (“IRS”) concluded an examination of the Company's U.S. income tax return for 2004. Tax years after 2005
9
remain open and subject to examination by the IRS. In addition, our subsidiaries in foreign countries have two geographical reporting segments, United Statestax years open ranging from 2003 through 2009.
The Company has recorded accruals to cover certain unresolved tax issues. Such contingent liabilities relate to additional taxes and Foreign Countries, bothinterest the Company may be required to pay in various tax jurisdictions. During the course of examinations by various taxing authorities, proposed adjustments may be asserted. The Company evaluates such items on a case-by-case basis and adjusts the accrual for contingent liabilities as deemed necessary.
The total amount of unrecognized tax benefit reserve as of March 31, 2010 is $9.0 million, which have goodwill.includes immaterial amounts of interest and penalties and is reflected as a liability on the balance sheet. The amount of income tax contingency reserve that, if recognized, would affect the effective tax rate is approximately $9.0 million. We recognize interest and penalties accrued related to income tax reserves in income tax expense.
The following table summarizes the changes in unrecognized tax positions during the carrying amount of goodwill, net of amortization, for the three monthsquarter ended March 31, 2009 were as follows:2010:
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 |
In thousands | ||
Unrecognized tax positions, January 1, 2010 | $ | 7,622 |
Gross increases- current period tax positions | 1,400 | |
Unrecognized tax positions, March 31, 2010 | $ | 9,022 |
NOTE 107 – LEGAL PROCEEDINGSSTOCK BASED COMPENSATION
We operateAt March 31, 2010 we had stock options outstanding under the following plans:
(i)
The 2008 Incentive Stock Plan, which our stockholders approved in a highly regulated industry and must deal with regulatory inquiries or investigations from timeMay 2008;
(ii)
the 2005 Incentive Stock Plan, which our stockholders approved in April 2005;
(iii)
the 2000 Nonstatutory Stock Option Plan, which our Board of Directors adopted in February 2000;
(iv)
the 1997 Stock Option Plan, which expired in January 2008;
(v)
the Directors Stock Option Plan, which expired in May 2006;
(vi)
the 1995 Incentive Compensation Plan, which expired in July 2005;
(vii)
our Employee Stock Purchase Plan, which our stockholders approved in May 2001.
The following table sets forth the expense related 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.stock compensation:
In thousands | ||||||
|
| Three Months Ended March 31, | ||||
|
| 2010 |
|
| 2009 | |
Stock options | $ | 3,650 |
| $ | 3,294 | |
Employee stock purchase program |
| 224 |
|
| 167 | |
Total pre-tax expense | $ | 3,874 |
| $ | 3,461 |
10
8The following table sets forth the tax benefits related to stock compensation:
In thousands | ||||||
|
| Three Months Ended March 31, | ||||
|
| 2010 |
|
| 2009 | |
Tax benefit recognized in income statement | $ | 1,528 |
| $ | 1,302 | |
Excess tax benefit realized |
| 1,163 |
|
| 264 |
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, | |||
| 2010 |
|
| 2009 |
Expected term (in years) | 5.75 |
|
| 5.5 |
Expected volatility | 28.32% |
|
| 28.22% |
Expected dividend yield | 0.00% |
|
| 0.00% |
Risk free interest rate | 2.46% |
|
| 2.10% |
The weighted average grant date fair value of the stock options granted during the three months ended March 31, 2010 and 2009 was $13.13 and $11.70, respectively.
Stock option activity for the three months ended March 31, 2010, 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, 2009 | 7,387,753 |
| $ | 35.43 |
|
|
|
|
|
Granted | 1,152,721 |
|
| 51.80 |
|
|
|
|
|
Exercised | (155,535) |
|
| 26.85 |
|
|
|
|
|
Cancelled or expired | (30,160) |
|
| 47.36 |
|
|
|
|
|
Outstanding at March 31, 2010 | 8,354,779 |
| $ | 37.80 |
| 6.71 |
| $ | 140,165,279 |
Exercisable at March 31, 2010 | 4,808,719 |
| $ | 31.03 |
| 5.47 |
| $ | 113,255,013 |
Vested and expected to vest in the future at March 31, 2010 | 7,606,086 |
| $ | 36.75 |
| 6.51 |
| $ | 135,600,695 |
The total intrinsic value of options exercised for the three months ended March 31, 2010 and 2009 was $4.3 million and $4.2 million, respectively. Intrinsic value is measured using the fair market value at the date of the exercise (for options exercised) or at March 31, 2010 (for outstanding options), less the applicable exercise price.
11
As of March 31, 2010, there was $28.8 million of total unrecognized compensation expense, related to non-vested stock options, which is expected to be recognized over a weighted-average period of 2.09 years.
NOTE 118 – NEW ACCOUNTING STANDARDSCOMMON STOCK
Effective January 1, 2009 we adopted 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) requiresDuring 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 ea rnings. This new accounting standard requires the company to recognize expenses to the income statement that were previously accounted for as acquisition accounting and reflected on the balance sheet. Net income for the first quarter of 2009 included the effect of $0.4 million of charges related to the adoption of SFAS No. 141(R). Because of the inherent 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 of the adoption of 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 quarterquarters ended March 31, 2010 and 2009, we repurchased on the adoptionopen market, and subsequently cancelled, 207,114 and 536,346 shares of SFAS No. 160 did not result in a material impact to our financial statements.common stock, respectively. The weighted average repurchase price was $54.36 and $47.59 per share, respectively.
Effective January 1, 2009 we adopted SFAS Statement No. 161, “Disclosures about Derivative InstrumentsThere was $0.6 million of current quarter share repurchases that were not settled as of March 31, 2010.
NOTE 9 – NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and Hedging Activities” (“SFAS No. 161”), to enhance the disclosure regarding the Company’s derivative and hedging activities to improve the transparency of financial reporting. diluted net income per share:
In thousands, except share and per share data | ||||||
|
| Three Months Ended March 31, | ||||
|
| 2010 |
|
| 2009 | |
Numerator: |
|
|
|
|
| |
Numerator for basic earnings per share |
|
|
|
|
| |
Net income attributable to Stericycle, Inc. | $ | 48,119 |
| $ | 40,655 | |
Denominator: |
|
|
|
|
| |
Denominator for basic earnings per share-weighted average shares |
| 84,766,721 |
|
| 84,908,733 | |
Effect of diluted securities: |
|
|
|
|
| |
Employee stock options |
| 1,806,516 |
|
| 1,933,170 | |
Dilutive potential shares |
| 1,806,516 |
|
| 1,933,170 | |
Denominator for diluted earnings per share-adjusted weighted average shares and after assumed exercises |
| 86,573,237 |
|
| 86,841,903 | |
|
|
|
|
|
| |
Earnings per share – Basic | $ | 0.57 |
| $ | 0.48 | |
|
|
|
|
|
| |
Earnings per share – Diluted | $ | 0.56 |
| $ | 0.47 |
NOTE 10 – COMPREHENSIVE INCOME
The components of total comprehensive income are net income, net income attributable to non-controlling interests, 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 components of total comprehensive income for the three months ended March 31, 2010 and 2009:
12
In thousands | |||||
|
| Three Months Ended March 31, | |||
|
| 2010 |
|
| 2009 |
Net income | $ | 48,634 |
| $ | 40,674 |
|
|
|
|
|
|
Other comprehensive income/ (loss): |
|
|
|
|
|
Currency translation adjustments |
| (10,405) |
|
| (5,343) |
Net gain on derivative instruments |
| 371 |
|
| 373 |
Other comprehensive loss |
| (10,034) |
|
| (4,970) |
|
|
|
|
|
|
Comprehensive income |
| 38,600 |
|
| 35,704 |
Less: Comprehensive income attributable to non-controlling interests |
| 515 |
|
| 19 |
Comprehensive income attributable to Stericycle, Inc. | $ | 38,085 |
| $ | 35,685 |
NOTE 11 – 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, 2010 were as follows:
In thousands | ||||||||
|
| United States |
|
| Foreign Countries |
|
| Total |
Balance as of January 1, 2010 | $ | 1,153,149 |
| $ | 240,942 |
| $ | 1,394,091 |
Changes due to currency fluctuation |
| -- |
|
| (7,157) |
|
| (7,157) |
Changes in goodwill on 2009 acquisitions |
| (4,257) |
|
| (579) |
|
| (4,836) |
Goodwill on 2010 acquisitions |
| 6,538 |
|
| 39,712 |
|
| 46,250 |
Balance as of March 31, 2010 | $ | 1,155,430 |
| $ | 272,918 |
| $ | 1,428,348 |
The changes to goodwill for 2009 acquisitions are primarily due to the finalization of intangible valuations and allocation of goodwill to the asset group held for sale.
NOTE 12 – GEOGRAPHIC INFORMATION
Management has determined that we have two reportable segments, United States (includes Puerto Rico) and Foreign Countries based on our consideration of the criteria detailed in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”Foreign. 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.
13
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, | ||||||||
|
| 2009 |
| 2008 |
| 2010 |
| 2009 | ||||
Regulated medical waste management services | $ | 202,351 |
| $ | 177,838 | |||||||
Regulated waste management services | $ | 229,090 |
| $ | 202,351 | |||||||
Regulated returns management services |
| 19,689 |
| 16,452 |
| 26,288 |
| 19,689 | ||||
Total revenue |
| 222,040 |
| 194,290 |
| 255,378 |
| 222,040 | ||||
Net interest expense |
| 6,560 |
| 6,502 |
| 7,613 |
| 6,560 | ||||
Income before income taxes |
| 56,995 |
| 48,956 |
| 64,760 |
| 56,995 | ||||
Income taxes |
| 22,202 |
| 17,972 |
| 23,943 |
| 22,202 | ||||
Net income | $ | 34,793 |
| $ | 30,984 | |||||||
Net income attributable to Stericycle, Inc. | $ | 40,817 |
| $ | 34,793 | |||||||
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization | $ | 6,696 |
| $ | 5,803 | $ | 8,696 |
| $ | 6,696 |
Detailed information for our Foreign Countries reporting segment is as follows:
In thousands | ||||||
|
| Three Months Ended March 31, | ||||
|
| 2009 |
|
| 2008 | |
Regulated medical waste management services | $ | 55,050 |
| $ | 60,494 | |
Net interest expense |
| 1,365 |
|
| 1,224 | |
Income before income taxes |
| 8,471 |
|
| 2,363 | |
Income taxes |
| 2,609 |
|
| 1,683 | |
Net income | $ | 5,862 |
| $ | 680 | |
|
|
|
|
|
| |
Depreciation and amortization | $ | 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 p articipants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three levels of the fair value hierarchy defined by SFAS No. 157 are as follows:
10
|
|
|
|
|
|
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.
At March 31, 2009, we have $9.1 million in cash and cash equivalents, and $3.0 million of short-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.
In thousands | |||||
|
| Three Months Ended March 31, | |||
|
| 2010 |
|
| 2009 |
Regulated waste management services | $ | 79,799 |
| $ | 55,050 |
Net interest expense |
| 1,270 |
|
| 1,365 |
Income before income taxes |
| 12,486 |
|
| 8,490 |
Income taxes |
| 4,669 |
|
| 2,609 |
Net income |
| 7,817 |
|
| 5,881 |
Net income attributable to noncontrolling interests |
| 515 |
|
| 19 |
Net income attributable to Stericycle, Inc. | $ | 7,302 |
| $ | 5,862 |
|
|
|
|
|
|
Depreciation and amortization | $ | 3,693 |
| $ | 2,148 |
NOTE 13 – 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.
On November 30, 2009, we entered into an agreement with the United States Department of Justice (“DOJ”) and the States of Missouri and Nebraska providing clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 that allowed us to complete our pending acquisition of MedServe, Inc., which we closed on December 4, 2009.
Our agreement with the DOJ and the States of Missouri and Nebraska agreement requires us to divest certain assets that we acquired from MedServe consisting of an autoclave treatment facility in Newton, Kansas, four transfer stations in Kansas, Oklahoma, Nebraska and Missouri and certain large customer accounts and associated assets related to these facilities. We have completed this required divestiture (see Note 16 – Subsequent Events). In addition, our agreement requires us for a period of ten years to notify the DOJ and the States of Missouri and Nebraska before acquiring any business
14
that is engaged in both the collection and treatment of infectious waste in Kansas, Missouri, Nebraska or Oklahoma.
NOTE 14 – DERIVATIVE INSTRUMENTSGUARANTEE
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 one year loan with a current balance of $5.4 million with JPMorganChase Bank N.A. that expires in May 2010. The loan with JPMorganChase and our associated guarantee is in the process of being extended beyond May 2011. We also have notes receivable to Shiraishi for approximately $14.9 million in support of their medical waste business. These amounts are collateralized with the assets of Shiraishi and related companies.
NOTE 15 – RESTRUCTURING CHARGES
In July 2004,December of 2009, we entered into four forward contracts,announced the consolidation of which three have settled, to hedge a GBP Sterling-based intercompany loan betweenoperations within our US-based subsidiary, Stericycle International L.L.C. and our subsidiaryReturns Management Services business. This consolidation will result in the United Kingdom, Stericycle International Ltd.closure of our facilities in Boynton Beach, Florida and Conyers, Georgia. The subsidiary borrowedoperations of those facilities will be moved to our Indianapolis, Indiana location. We have recognized $1.6 million in expense during the funds forfourth quarter of 2009 and $0.7 million in expense during the purchasefirst quarter of White Rose. The remaining forward contract aligns with2010 related to this restructuring. We have an accrual balance of $0.8 million related to the anticipated repayment schedulerestructuring at March 31, 2010. We estimate an additional $0.9 million in expense during the remainder of 2010. We expect that our restructuring will be completed by the loanend of 2010. We believe this restructuring will allow us to maximize the efficiency of our Returns Management Services business at a single location and expires in July 2009. Initially, we did not elect hedge accounting on the forward contracts and had recognized the change in value of the hedges through other income
11management infrastructu re.
(expense). This amount was generally offset by the currency adjustment to the intercompany receivable.NOTE 16 – SUBSEQUENT EVENT
On October 1, 2005, we prospectively designated these existing forward contracts as cash flow hedges and are using hedge accounting. The objective of our cash flow hedges is to offset the foreign exchange risk to the U.S. dollar equivalent cash inflows on the settlement of the GBP denominated intercompany loan. At March 31, 2009, the fair market value of the hedge was recorded asApril 23, 2010, an interest rate swap contract with a current asset of $2.5 million. As of March 31, 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.$75 million expired.
In October 2008, Stericycle entered into three interest rate swap contracts covering $225On April 30, 2010, we completed the required divestiture of selected assets related to the MedServe acquisition for $8.0 million of our borrowings outstanding under our senior credit facility. The objective of the swap is to reduce the risk of volatile interest expense by fixing the rate. The contracts are as follows:(see Note 13 – Legal Proceedings).
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 Company evaluated subsequent events through the date of filing this Quarterly Report on Form 10-Q.
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 payable is discounted to arrive at the fair value of the three hedges.
15
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 420,000465,000 customers throughout the United States, Argentina, Brazil, Canada, Chile, Ireland, Mexico, Portugal, Puerto Rico, Romania, and the United Kingdom, Canada, Mexico, Ireland, Argentina, Chile and Puerto Rico.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 regulated medical waste management services, and regulated return management services. Regulated medical waste management services include servicing a variety of customers to removeregulated waste removal services, sharps management services, products and process waste while regulatedservices for infection control, and safety and compliance programs. 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 communicate 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. 141 (R) Business Combinations, (see Note 11 – New Accounting Standards, for the impact on the financial statements), thereThere were no material changes in the Company’s critical accounting policies since the filing of its 20082009 Form 10-K. As discussed in the 20082009 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 our first quarter results for 2010 include the following:
·
revenues for the first quarter 2010 grew to $335.2 million, a 21.0% increase over $277.1 million for the first quarter 2009
·
gross margins improved to 46.3% in 2010 from 46.1% in 2009
·
operating income before acquisition-related costs and restructuring charges increased 19.8% to $89.7 million for the first quarter 2010 from $74.9 million in the first quarter 2009
·
cash flow from operations was $81.1 million
16
THREE MONTHS ENDED MARCH 31, 20092010 COMPARED TO THREE MONTHS ENDED MARCH 31, 20082009
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, | ||||||||||||||||||
|
| 2009 |
|
| 2008 |
| 2010 |
|
| 2009 | ||||||||||||
|
| $ |
|
| % |
|
| $ |
| % |
| $ |
|
| % |
|
| $ |
| % | ||
Revenues | $ | 277,090 |
|
| 100.0 |
| $ | 254,784 |
| 100.0 | $ | 335,177 |
|
| 100.0 |
| $ | 277,090 |
| 100.0 | ||
Cost of revenues |
| 149,287 |
|
| 53.9 |
|
| 141,194 |
| 55.4 |
| 170,570 |
|
| 50.9 |
|
| 142,594 |
| 51.5 | ||
Restructuring costs |
| 428 |
|
| 0.1 |
|
| -- |
| -- | ||||||||||||
Depreciation |
| 8,862 |
|
| 2.6 |
|
| 6,693 |
| 2.4 | ||||||||||||
Total cost of revenues |
| 179,860 |
|
| 53.7 |
|
| 149,287 |
| 53.9 | ||||||||||||
Gross profit |
| 127,803 |
|
| 46.1 |
|
| 113,590 |
| 44.6 |
| 155,317 |
|
| 46.3 |
|
| 127,803 |
| 46.1 | ||
Selling, general and administrative expenses |
| 52,993 |
|
| 19.1 |
|
| 48,750 |
| 19.1 |
| 62,470 |
|
| 18.6 |
|
| 50,731 |
| 18.3 | ||
Arbitration settlement and related expenses |
| -- |
|
| -- |
|
| 5,352 |
| 2.1 | ||||||||||||
Acquisition related transaction expenses |
| 610 |
|
| 0.2 |
|
| -- |
| -- | ||||||||||||
Depreciation |
| 1,552 |
|
| 0.5 |
|
| 1,141 |
| 0.4 | ||||||||||||
Amortization |
| 1,975 |
|
| 0.6 |
|
| 1,010 |
| 0.4 | ||||||||||||
Total selling, general and administrative expenses |
| 65,997 |
|
| 19.7 |
|
| 52,882 |
| 19.1 | ||||||||||||
Restructuring costs |
| 239 |
|
| 0.1 |
|
| -- |
| -- | ||||||||||||
Transactional expenses related to acquisitions |
| 800 |
|
| 0.2 |
|
| 610 |
| 0.2 | ||||||||||||
Acquisition integration expenses |
| 1,149 |
|
| 0.3 |
|
| 111 |
| 0.0 | ||||||||||||
Income from operations |
| 74,200 |
|
| 26.8 |
|
| 59,488 |
| 23.3 |
| 87,132 |
|
| 26.0 |
|
| 74,200 |
| 26.8 | ||
Net interest expense |
| 7,925 |
|
| 2.9 |
|
| 7,726 |
| 3.0 |
| 8,883 |
|
| 2.7 |
|
| 7,925 |
| 2.9 | ||
Income tax expense |
| 24,811 |
|
| 9.0 |
|
| 19,655 |
| 7.7 |
| 28,612 |
|
| 8.5 |
|
| 24,811 |
| 9.0 | ||
Net income | $ | 40,655 |
|
| 14.7 |
| $ | 31,664 |
| 12.4 |
| 48,634 |
|
| 14.5 |
|
| 40,674 |
| 14.7 | ||
Net income attributable to noncontrolling interests |
| 515 |
|
| 0.2 |
|
| 19 |
| 0.0 | ||||||||||||
Net income attributable to Stericycle, Inc. | $ | 48,119 |
|
| 14.4 |
| $ | 40,655 |
| 14.7 | ||||||||||||
Earnings per share- diluted | $ | 0.47 |
|
|
|
| $ | 0.35 |
|
| $ | 0.56 |
|
|
|
| $ | 0.47 |
|
|
Revenues: Our revenues increased $22.3$58.1 million, or 8.8%21.0%, to $335.2 million in 2010 from $277.1 million in 2009 from $254.8 million in 2008.2009. Domestic revenues increased $27.8$33.3 million or 14.3%15.0% to $255.4 million from $222.0 million from $194.3 million in 20082009 as internal revenue growth for domestic small account customers increased by approximately $10.9$9.8 million, or 10%8%, and internal revenue growth for large quantity customers increased by approximately $4.0$3.8 million, or 6%5%. Internal revenue growth for returns management decreasedincreased by $2.0$6.6 million, and domestic acquisitions less than one year old contributed approximately $14.9$13.1 million to the increase in domestic revenues.
13
International revenues decreased $5.4increased $24.7 million to $79.8 million, or 45.0%, from $55.1 million or 9.0%, from $60.5 million in 2008.2009. Internal growth in the international segment contributed $5.9$4.0 million, or 10%7% to the increase in international revenues, before taking into consideration the effect of exchange rates and acquisitions. The effect of exchange rate fluctuations unfavorablyfavorably impacted international revenues approximately $16.1$5.0 million while acquisitions less than one year old contributed $4.8$15.7 million in international revenues.
17
Cost of Revenues: Our cost of revenues increased $8.1$30.6 million, or 5.7%20.5%, to $179.9 million during 2010 from $149.3 million during 2009 from $141.2 million during 2008.2009. Our domestic cost of revenues increased $12.5$15.2 million, or 12.3%13.3%, to $129.0 million from $113.8 million from $101.3 million in 20082009 as a result of costs related to a proportional increase in revenues from acquisitions and internal growth. Our international cost of revenues decreased $4.4increased $15.4 million, or 11.0%43.3% to $50.9 million from $35.5 million from $39.9 million in 20082009 as a result of costs related to proportional decreaseincrease in revenues primarily driven by thefrom acquisitions and impact of exchange rates. Our company wide gross margin percentage increased to 46.3% during 2010 from 46.1% during 2009 from 44.6% during 2008 due to a decrease inlower relative treatments costs, partially offset by slightly higher relative fuel and energy costs and restructuring costs.
Selling, General and Administrative Expenses: Selling, general and administrative (“SG&A”) expenses including acquisition related costs, increased $4.2$13.1 million, or 8.7%24.8%, to $53.0$66.0 million, for the quarter ended March 31, 20092010 from $48.8$52.9 million for the comparable quarter in 2008.2009. As a percentage of revenue, these costs were flatincreased 0.6% for the quarter ended March 31, 20092010 compared to the same period in 2008.2009.
Domestically, first quarter 2010 SG&A increased $7.8 million, or 17.9%, to $51.4 million from $43.6 million in the same period last year. The increase was primarily due to higher amortization and stock option expenses, integration spending related to acquisitions, market penetration for our Bio Systems® sharps management and pharma waste programs and investments in the Steri-Safe services.
Internationally, our SG&A increased $5.3 million, during the quarter ended March 31, 2010 to $14.6 million from $9.3 million during the same period in 2009, mostly due to acquisitions and related higher expenses.
Income from Operations: Income from operations increased $12.9 million to $74.2$87.1 million for the quarter ended March 31, 20092010 from $59.5$74.2 million for the comparable quarter in 2008,2009, an increase of 24.7%17.4%. This increase is partially attributedDuring the quarter ended March 31, 2010, we recognized $0.8 million in transactional expenses related to acquisition as result of adopting changes issued by FASB to accounting rules related to business combinations and $0.7 million of restructuring costs for our regulated returns management service business. We believe this restructuring will allow us to maximize the efficiency of our Returns Management Services business at a business dispute settlementsingle location and related costs that weremanagement infrastructure. During the quarter ended March 31, 2009, we recognized $0.6 million in transactional expenses described above.
Domestically, our income from operations increased $8.9 million, or 13.8%, to $73.5 million during the quarter ended March 31, 2008 of $5.42010 from $64.6 million which did not repeat during the same period in 2009. Internationally, our income from operations increased $4.0 million, or 41.7%, to $13.6 million during the quarter ended March 31, 2010 from $9.6 million during the same period in 2009.
Net Interest Expense: Net interest expense slightly increased to $7.9$8.9 million during the quarter ended March 31, 20092010 from $7.7$7.9 million during the comparable quarter in 20082009 due to increased borrowings partially offset by lower interest rates. borrowings.
18
Income Tax Expense: Income tax expense increased to $24.8$28.6 million for the quarter ended March 31, 20092010 from $19.7$24.8 million for the comparable quarter in 2008.2009. The increase was due to higher taxable income. The effective tax rates for the quarters ended March 31, 2010 and 2009 were 37.0% and 2008 were 37.9% and 38.3%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our $850 million senior credit facility of $850.0 million maturing in August 2012, requiresour $215 million term loan maturing in June 2012, and our $100 million private placement notes maturing April 2015, all require us to comply with various financial, reporting and other covenants and restrictions, including a restriction on dividend payments. The financial debt covenants are the same for the senior credit facility, the term loan credit agreement and the private placement notes. At March 31, 2009,2010, we were in compliance with all of our financial debt covenants. At March 31, 2009 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.
14
As of March 31, 2009,2010, we had $415$405.0 million of borrowings outstanding under our $850 million senior unsecured credit facility, which includes foreign currency borrowings of $5$36.5 million. In addition, weWe also had $208$194.2 million committed to outstanding letters of credit. credit under this facility. The unused portion of the revolving credit facility as of March 31, 2010 was $250.8 million. At March 1, 2010, our interest rates on borrowings under our revolving credit facility were
·
For short-term borrowing (less than one month): Federal funds rate plus 0.5% or prime rate, whichever is higher; and
·
For borrowing greater than one month: LIBOR plus 0.875%.
The weighted average rate of interest on the unsecured revolving credit facility was 1.30%1.14% per annum. At
As of March 31, 20092010, we had $349$215 million in otherterm loan debt outstanding which was entered into during 2009 with several lenders maturing in June 2012. Term loans under the term loan credit agreement bear interest at fluctuating interest rates determined, for any one-month or other applicable interest period, by reference to the LIBOR plus the applicable margin provided in the term loan agreement. The applicable margin is based on our consolidated leverage ratio and ranges from 2.75% to 3.50%. As of March 31, 2010, the applicable margin was 3.25%. The weighted average rate of interest on the term loan was 4.43% per annum which includes promissory notes issued in connection with acquisitions during 2004 through 2009, other foreign subsidiary bank debtthe amounts under our interest rate hedge. After the first year, we are required to make quarterly principal payments of 2.5% of the principal amount of the outstanding term loans, and capital leases.the remainder at maturity.
OnAs of March 31, 2010, we had $100 million outstanding 5.64% private placement notes which we entered into 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”).purchasers. 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, 2009, and principal is payable at the maturity of the notes on April 15, 2015.
The
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At March 31, 2010, we had $276.7 million in other debt outstanding, which includes promissory notes are unsecured obligationsissued in connection with acquisitions during 2004 through 2010, other foreign subsidiary bank debt, 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.capital leases.
Working Capital: At March 31, 2009,2010, our working capital decreased $8.3increased $2.2 million to $36.5$28.0 million compared to $44.8$25.8 million at December 31, 2008. Of the decrease in2009. Increases to working capital $9.9 million relates 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 movementswere mainly related to an acquisition paymentincrease of $12.0net accounts receivable of $12.5 million that was accrued for in December while accrued income taxes increased by $14.5primarily due to higher sales, and prepaid expenses of $6.9 million primarily due to the timing of payroll funding. Various other increases to current assets accounted for $5.9 million. Decreases to working capital were mainly related to an increase in accrued liabilities of $21.6 million primarily related to the timing of income tax payments.payments and liabilities related to acquisitions. Other decreases to working capital related to current liabilities accounted for $1.5 million.
Net Cash Provided or Used: Net cash provided by operating activities increased $12.7$4.8 million, or 19.9%6.3%, to $76.3$81.1 million during the quarter ended March 31, 20092010 compared to $63.6$76.3 million for the comparable period in 2008.2009. The increase in operating cash was primarily due to higher earnings and increased collections on receivables.earnings.
Net cash used in investing activities for the quarter ended March 31, 20092010 was $26.1$63.7 million compared to net cash used of $18.0$26.1 million in the comparable period in 2008.2009. The difference is mainly due to $16.3an increase of $34.2 million paid foron acquisitions and international investments in 2009, compared to $7.8 millionthe first quarter of 2010 than for the same period in the prior year partially offset by lower capitalyear. Capital expenditures which decreasedalso increased during the current period by $2.9$4.4 million when compared to same period of the prior year.
Net cash used in financing activities was $52.0$7.9 million during the quarter ended March 31, 20092010 compared to $48.0$52.0 million for the comparable period in 2008.
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A2009. We had a decrease of $51.9$25.4 million for thein debt repayments and a $16.9 million decrease in repurchase and cancellationcancelation of common stock overin the prior yearfirst quarter of 2010 compare to the same period was offset by a $57.0 million increase for repayment of long-term debt.last year.
Guarantees: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 monthone year loan with a current balance of $5.1$5.4 million with JPMorganChase Bank N.A. that expires in May 2009.2010. The loan with JPMorganChase and our associated guarantee is in the process of being extended beyond May 2010.2011. We also have notes receivable to Shiraishi for approximately $14.9 million in support of their medical waste business. These amounts are collateralized with the assets of Shiraishi and related companies.
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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risks arising from changes in interest rates. In 2008,As of March 31, 2010, we entered into threehave two interest rate derivative transactions that effectively fix the interest rate on the applicable notional amountsswap contracts covering $100 million of our variable rate debtborrowings outstanding under our senior credit facility. The objective of the swap is to reduce the risk of volatile interest expense by fixing the rate. The details of these two contracts are as follows:
In thousands | In thousands | In thousands | ||||||
Notional | Fixed | Variable | Expiration | Fixed | Variable | Expiration | ||
Amount | Interest Rate | Interest Rate | Date | Interest Rate | Interest Rate | Date | ||
$ 125,000 | 2.79% | 1 Month Libor | October 2009 | |||||
$ 75,000 | 2.79% | 1 Month Libor | April 2010 | 2.79% | 1 Month Libor | April 2010 | ||
$ 25,000 | 2.94% | 1 Month Libor | October 2010 | 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 $4.5$5.7 million on a pre-tax basis.
We have exposure to foreign currency fluctuations. We have subsidiaries in nine foreign countries whose functional currency is the local currency. Changes in foreign currency exchange rate fluctuations between the U.S. dollar and U.K. pound sterling (“GBP”) related to an eight million GBP intercompany loan to Stericycle International, Ltd., the parent companyrates could unfavorably impact our consolidated results of White Rose Environmental. We use cash flow hedge accounting treatment on our forward contracts. Both 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.operations.
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.
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
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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
The term internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuers’ principal executive and principal financial officers, and effected by the issuer’s Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (added this). During the quarter ended March 31, 2009,2010, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to 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 10,13, 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
Under resolutions that our Board of Directors adopted in May 2002, February 2005, February 2007, May 2007 and May 2008, we have been authorized to purchase a cumulative total of 16,224,578 shares of our common stock on the open market. As of March 31, 2009,2010, we had purchased a cumulative total of 12,204,11613,393,231 shares.
The following table provides information about our purchases during the three months ended March 31, 20092010 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, 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 |
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, 2010 |
| -- |
| $ | -- |
| -- |
| 3,038,461 |
February 1- February 28, 2010 |
| 8,609 |
|
| 50.91 |
| 8,609 |
| 3,029,852 |
March 1- March 31, 2010 |
| 198,505 |
|
| 54.51 |
| 198,505 |
| 2,831,347 |
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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
SIGNATURESSIGNATURE
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 7, 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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