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 ended September 30, 2010 March 31, 2011
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 x 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 November 2, 2010May 3, 2011 there were 85,530,67585,848,988 shares of the registrant’s Common Stock outstanding.
Stericycle, Inc.
Table of Contents
Page No. | ||||
1 | ||||
2 | ||||
3 | ||||
4 | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited) | 5 | |||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
Item 3. | ||||
Certifications |
PART I. – FINANCIAL INFORMATION
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands, except share and per share data | September 30, 2010 | December 31, 2009 | In thousands, except share and per share data | |||||||||||||
March 31, 2011 | December 31, 2010 | |||||||||||||||
(Unaudited) | (Audited) | (Unaudited) | (Audited) | |||||||||||||
ASSETS | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 20,627 | $ | 15,767 | $ | 24,656 | $ | 77,053 | ||||||||
Short-term investments | 18,632 | 1,131 | 19,768 | 18,471 | ||||||||||||
Accounts receivable, less allowance for doubtful accounts of $11,432 in 2010 and $8,709 in 2009 | 216,508 | 179,770 | ||||||||||||||
Accounts receivable, less allowance for doubtful accounts of $9,916 in 2011 and $10,845 in 2010 | 231,171 | 215,420 | ||||||||||||||
Deferred income taxes | 14,935 | 14,087 | 15,408 | 16,824 | ||||||||||||
Prepaid expenses | 13,490 | 12,421 | 21,448 | 16,038 | ||||||||||||
Other current assets | 28,949 | 23,364 | 25,212 | 24,882 | ||||||||||||
Total Current Assets | 313,141 | 246,540 | 337,663 | 368,688 | ||||||||||||
Property, Plant and Equipment, net | 262,650 | 246,154 | 272,593 | 267,971 | ||||||||||||
Other Assets: | ||||||||||||||||
Goodwill | 1,476,156 | 1,394,091 | 1,616,504 | 1,595,764 | ||||||||||||
Intangible assets, less accumulated amortization of $25,179 in 2010 and $18,546 in 2009 | 349,375 | 269,454 | ||||||||||||||
Intangible assets, less accumulated amortization of $31,991 in 2011 and $28,394 in 2010 | 388,812 | 375,174 | ||||||||||||||
Other | 32,964 | 26,564 | 28,065 | 31,426 | ||||||||||||
Total Other Assets | 1,858,495 | 1,690,109 | 2,033,381 | 2,002,364 | ||||||||||||
Total Assets | $ | 2,434,286 | $ | 2,182,803 | $ | 2,643,637 | $ | 2,639,023 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Current portion of long-term debt | $ | 96,932 | $ | 78,026 | $ | 83,516 | $ | 88,899 | ||||||||
Accounts payable | 49,354 | 47,608 | 56,120 | 54,777 | ||||||||||||
Accrued liabilities | 106,778 | 92,226 | 127,623 | 134,711 | ||||||||||||
Deferred revenues | 16,925 | 14,954 | 14,679 | 14,455 | ||||||||||||
Other current liabilities | 10,307 | 15,647 | ||||||||||||||
Total Current Liabilities | 269,989 | 232,814 | 292,245 | 308,489 | ||||||||||||
Long-term debt, net of current portion | 880,452 | 910,825 | 921,554 | 1,014,222 | ||||||||||||
Deferred income taxes | 214,050 | 171,744 | 241,096 | 222,647 | ||||||||||||
Other liabilities | 12,811 | 10,247 | 10,735 | 13,315 | ||||||||||||
Shareholders’ Equity: | ||||||||||||||||
Common stock (par value $.01 per share, 120,000,000 shares authorized, 85,467,697 issued and outstanding in 2010, 84,715,005 issued and outstanding in 2009) | 855 | 847 | ||||||||||||||
Equity: | ||||||||||||||||
Common stock (par value $.01 per share, 120,000,000 shares authorized, 85,702,145 issued and outstanding in 2011 and 85,242,387 issued and outstanding in 2010) | 857 | 852 | ||||||||||||||
Additional paid-in capital | 70,659 | 47,522 | 75,146 | 46,945 | ||||||||||||
Accumulated other comprehensive loss | (14,448 | ) | (12,292 | ) | ||||||||||||
Accumulated other comprehensive income | (3,931 | ) | (16,869 | ) | ||||||||||||
Retained earnings | 967,517 | 809,618 | 1,073,171 | 1,017,497 | ||||||||||||
Total Stericycle, Inc. Shareholders’ Equity | 1,024,583 | 845,695 | ||||||||||||||
Total Stericycle, Inc.’s Equity | 1,145,243 | 1,048,425 | ||||||||||||||
Noncontrolling interest | 32,401 | 11,478 | 32,764 | 31,925 | ||||||||||||
Total Shareholders’ Equity | 1,056,984 | 857,173 | ||||||||||||||
Total Equity | 1,178,007 | 1,080,350 | ||||||||||||||
Total Liabilities and Shareholders’ Equity | $ | 2,434,286 | $ | 2,182,803 | ||||||||||||
Total Liabilities and Equity | $ | 2,643,637 | $ | 2,639,023 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
In thousands, except for share and per share data | In thousands, except for share and per share data | |||||||||||||||||||||||
Three Months Ended March 31, | ||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | 2011 | 2010 | |||||||||||||||||||||
In thousands, except share and per share data | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||
Revenues | $ | 362,988 | $ | 297,836 | $ | 1,045,899 | $ | 864,194 | $ | 398,126 | $ | 335,177 | ||||||||||||
Costs and Expenses: | ||||||||||||||||||||||||
Cost of revenues | 185,515 | 150,272 | 532,625 | 438,484 | 205,816 | 170,570 | ||||||||||||||||||
Selling, general and administrative expenses | 65,033 | 54,312 | 191,067 | 158,090 | 69,972 | 62,470 | ||||||||||||||||||
Depreciation and amortization | 13,504 | 9,959 | 38,510 | 28,463 | 15,103 | 12,389 | ||||||||||||||||||
Acquisition expenses | 1,891 | 3,478 | 3,247 | 5,418 | 3,798 | 800 | ||||||||||||||||||
Integration expenses | 790 | 282 | 3,253 | 466 | 766 | 1,149 | ||||||||||||||||||
Restructuring costs and plant closure expense | 216 | — | 2,446 | — | ||||||||||||||||||||
Litigation settlement | — | — | 937 | — | ||||||||||||||||||||
Gain on sale of assets | — | — | (2,955 | ) | — | |||||||||||||||||||
Restructuring costs | 258 | 667 | ||||||||||||||||||||||
Total Costs and Expenses | 266,949 | 218,303 | 769,130 | 630,921 | 295,713 | 248,045 | ||||||||||||||||||
Income from Operations | 96,039 | 79,533 | 276,769 | 233,273 | 102,413 | 87,132 | ||||||||||||||||||
Other Income (Expense): | ||||||||||||||||||||||||
Interest income | 82 | 48 | 194 | 271 | 184 | 80 | ||||||||||||||||||
Interest expense | (8,509 | ) | (9,262 | ) | (26,342 | ) | (25,561 | ) | (11,372 | ) | (8,963 | ) | ||||||||||||
Other income (expense), net | 333 | (646 | ) | (1,562 | ) | (2,264 | ) | |||||||||||||||||
Other expense, net | (263 | ) | (1,003 | ) | ||||||||||||||||||||
Total Other Income (Expense) | (8,094 | ) | (9,860 | ) | (27,710 | ) | (27,554 | ) | ||||||||||||||||
Total Other Expense | (11,451 | ) | (9,886 | ) | ||||||||||||||||||||
Income Before Income Taxes | 87,945 | 69,673 | 249,059 | 205,719 | 90,962 | 77,246 | ||||||||||||||||||
Income Tax Expense | 30,645 | 23,110 | 89,359 | 74,488 | 34,376 | 28,612 | ||||||||||||||||||
Net Income | 57,300 | 46,563 | 159,700 | 131,231 | $ | 56,586 | $ | 48,634 | ||||||||||||||||
Less: Net Income Attributable to Noncontrolling Interests | 614 | 37 | 1,801 | 148 | 912 | 515 | ||||||||||||||||||
Net Income Attributable to Stericycle, Inc. | $ | 56,686 | $ | 46,526 | $ | 157,899 | $ | 131,083 | $ | 55,674 | $ | 48,119 | ||||||||||||
Earnings Per Share Attributable to Stericycle, Inc. Common Shareholders: | ||||||||||||||||||||||||
Earnings Per Common Share Attributable to Stericycle Inc. Common Shareholders: | ||||||||||||||||||||||||
Basic | $ | 0.66 | $ | 0.55 | $ | 1.86 | $ | 1.54 | $ | 0.65 | $ | 0.57 | ||||||||||||
Diluted | $ | 0.65 | $ | 0.54 | $ | 1.82 | $ | 1.51 | $ | 0.64 | $ | 0.56 | ||||||||||||
Weighted Average Number of Common Shares Outstanding: | ||||||||||||||||||||||||
Basic | 85,295,740 | 84,899,815 | 84,986,187 | 84,909,316 | 85,459,302 | 84,766,721 | ||||||||||||||||||
Diluted | 87,179,057 | 86,794,118 | 86,830,761 | 86,827,626 | 87,526,683 | 86,573,237 |
The accompanying notes are an integral part of these financial statements.
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
In thousands | In thousands | |||||||||||||||
Three Months Ended March 31, | ||||||||||||||||
Nine Months Ended September 30, | 2011 | 2010 | ||||||||||||||
In thousands | 2010 | 2009 | ||||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||
Net income | $ | 159,700 | $ | 131,231 | $ | 56,586 | $ | 48,634 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Gain on sale of assets | (2,955 | ) | — | |||||||||||||
Stock compensation expense | 11,441 | 10,861 | 3,863 | 3,874 | ||||||||||||
Excess tax benefit of stock options exercised | (17,951 | ) | (357 | ) | ||||||||||||
Excess tax benefit stock options exercised | (8,092 | ) | (1,163 | ) | ||||||||||||
Depreciation | 31,858 | 24,643 | 11,756 | 10,414 | ||||||||||||
Amortization | 6,652 | 3,820 | 3,347 | 1,975 | ||||||||||||
Deferred income taxes | 20,307 | 20,718 | 16,051 | 13,784 | ||||||||||||
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures: | ||||||||||||||||
Accounts receivable | (26,366 | ) | 8,204 | (11,615 | ) | (7,932 | ) | |||||||||
Accounts payable | (3,477 | ) | (4,502 | ) | (433 | ) | (3,522 | ) | ||||||||
Accrued liabilities | 19,214 | 20,452 | (1,341 | ) | 15,601 | |||||||||||
Deferred revenues | 1,942 | 252 | ||||||||||||||
Other assets | 5,061 | (1,395 | ) | |||||||||||||
Deferred revenue | (34 | ) | 1,611 | |||||||||||||
Other assets and liabilities | (4,503 | ) | (2,221 | ) | ||||||||||||
Net cash provided by operating activities | 205,426 | 213,927 | 65,585 | 81,055 | ||||||||||||
INVESTING ACTIVITIES: | ||||||||||||||||
Payments for acquisitions and international investments, net of cash acquired | (95,615 | ) | (107,079 | ) | (19,543 | ) | (50,459 | ) | ||||||||
Purchases of short-term investments | (17,172 | ) | (58 | ) | ||||||||||||
Proceeds from sale of assets | 8,000 | 640 | ||||||||||||||
Purchase of short-term investments | (1,240 | ) | (423 | ) | ||||||||||||
Proceeds from sale of property and equipment | 389 | 0 | ||||||||||||||
Capital expenditures | (35,937 | ) | (29,644 | ) | (11,692 | ) | (12,804 | ) | ||||||||
Net cash used in investing activities | (140,724 | ) | (136,141 | ) | (32,086 | ) | (63,686 | ) | ||||||||
FINANCING ACTIVITIES: | ||||||||||||||||
Repayment of long-term debt | (45,292 | ) | (10,443 | ) | (24,563 | ) | (27,533 | ) | ||||||||
Net repayments on senior credit facility | (13,072 | ) | (213,027 | ) | ||||||||||||
Proceeds from term loan | — | 215,000 | ||||||||||||||
Payments of deferred financing costs | (5,757 | ) | (3,620 | ) | ||||||||||||
Payments on capital lease obligations | (2,172 | ) | (255 | ) | ||||||||||||
Net (repayments)/ borrowings on senior credit facility | (86,044 | ) | 24,873 | |||||||||||||
Purchase / cancellation of treasury stock | (43,589 | ) | (69,986 | ) | 0 | (10,616 | ) | |||||||||
Proceeds from other issuance of common stock | 38,224 | 11,726 | ||||||||||||||
Excess tax benefit of stock options exercised | 17,951 | 357 | ||||||||||||||
Proceeds from issuance of common stock | 14,811 | 4,195 | ||||||||||||||
Excess tax benefit stock options exercised | 8,092 | 1,163 | ||||||||||||||
Net cash used in financing activities | (53,707 | ) | (70,248 | ) | (87,704 | ) | (7,918 | ) | ||||||||
Effect of exchange rate changes on cash | (6,135 | ) | (2,347 | ) | 1,808 | (2,332 | ) | |||||||||
Net increase in cash and cash equivalents | 4,860 | 5,191 | ||||||||||||||
Net (decrease)/ increase in cash and cash equivalents | (52,397 | ) | 7,119 | |||||||||||||
Cash and cash equivalents at beginning of period | 15,767 | 9,095 | 77,053 | 15,767 | ||||||||||||
Cash and cash equivalents at end of period | $ | 20,627 | $ | 14,286 | $ | 24,656 | $ | 22,886 | ||||||||
NON-CASH ACTIVITIES: | ||||||||||||||||
Net issuance of notes payable for certain acquisitions | $ | 31,641 | $ | 32,116 | $ | 1,100 | $ | 10,038 |
The accompanying notes are an integral part of these financial statements.
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
September 30, 2010Three Months Ended March 31, 2011 (Unaudited) and
Year Ended December 31, 2009
(Unaudited)2010 (Audited)
In thousands | In thousands | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stericycle, Inc. Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stericycle, Inc. Equity | Issued and Outstanding Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
In thousands | Issued and Outstanding Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2008 | 85,253 | $ | 852 | $ | 67,776 | $ | 633,927 | $ | (32,075 | ) | $ | 158 | $ | 670,638 | ||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2009 | 84,715 | $ | 847 | $ | 47,522 | $ | 809,618 | $ | (12,292 | ) | $ | 11,478 | $ | 857,173 | ||||||||||||||||||||||||||||||||||||||||||
Net income | 207,879 | 2,578 | 210,457 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustment | (2,544 | ) | 2,938 | 394 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of cash flow hedge, net of tax of $1,353 | (2,033 | ) | (2,033 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | 208,818 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for exercise of options and employee stock purchases | 1,132 | 12 | 15,889 | — | — | — | 15,901 | 1,988 | 20 | 50,491 | 50,511 | |||||||||||||||||||||||||||||||||||||||||||||
Purchase/ cancellation of treasury stock | (1,670 | ) | (17 | ) | (73,164 | ) | — | — | — | (73,181 | ) | (1,461 | ) | (15 | ) | (94,320 | ) | (94,335 | ) | |||||||||||||||||||||||||||||||||||||
Stock compensation expense | — | — | 14,638 | — | — | — | 14,638 | 18,565 | 18,565 | |||||||||||||||||||||||||||||||||||||||||||||||
Excess tax benefit of disqualifying dispositions of stock options and exercise of non-qualified stock options | — | — | 22,383 | — | — | — | 22,383 | |||||||||||||||||||||||||||||||||||||||||||||||||
Excess tax benefit of stock options exercised | 24,687 | 24,687 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in noncontrolling interest | — | — | — | — | — | 9,787 | 9,787 | 14,931 | 14,931 | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2010 | 85,242 | $ | 852 | $ | 46,945 | $ | 1,017,497 | $ | (16,869 | ) | $ | 31,925 | $ | 1,080,350 | ||||||||||||||||||||||||||||||||||||||||||
Net income | 55,674 | 912 | 56,586 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustment | — | — | — | — | 17,595 | 835 | 18,430 | 12,853 | 138 | 12,991 | ||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of cash flow hedge, net of tax of $454 | — | — | — | — | 2,188 | — | 2,188 | |||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 175,691 | — | 698 | 176,389 | |||||||||||||||||||||||||||||||||||||||||||||||||
Amounts reclassified into income, net of tax of $54 | 85 | 85 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | 197,007 | 69,662 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for exercise of options and employee stock purchases | 460 | 5 | 16,246 | 16,251 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock compensation expense | 3,863 | 3,863 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Excess tax benefit of stock options exercised | 8,092 | 8,092 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in noncontrolling interest | (211 | ) | (211 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2009 | 84,715 | $ | 847 | $ | 47,522 | $ | 809,618 | $ | (12,292 | ) | $ | 11,478 | $ | 857,173 | ||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2011 | 85,702 | $ | 857 | $ | 75,146 | $ | 1,073,171 | $ | (3,931 | ) | $ | 32,764 | $ | 1,178,007 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for exercise of options and employee stock purchases | 1,504 | 15 | 37,327 | — | — | — | 37,342 | |||||||||||||||||||||||||||||||||||||||||||||||||
Purchase/ cancellation of treasury stock | (751 | ) | (7 | ) | (43,582 | ) | — | — | — | (43,589 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Stock compensation expense | — | — | 11,441 | — | — | — | 11,441 | |||||||||||||||||||||||||||||||||||||||||||||||||
Excess tax benefit of disqualifying dispositions of stock options and exercise of non-qualified stock options | — | — | 17,951 | — | — | — | 17,951 | |||||||||||||||||||||||||||||||||||||||||||||||||
Change in noncontrolling interest | — | — | — | — | — | 16,923 | 16,923 | |||||||||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustment | — | — | — | — | (2,831 | ) | 2,199 | (632 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of cash flow hedge, net of tax of $431 | — | — | — | — | 675 | — | 675 | |||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 157,899 | — | 1,801 | 159,700 | |||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | 159,743 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2010 | 85,468 | $ | 855 | $ | 70,659 | $ | 967,517 | $ | (14,448 | ) | $ | 32,401 | $ | 1,056,984 | ||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
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; butregulations. However, the Company believes the disclosures included 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. Current amounts in previously issued financial statements were reclassified to conform to the current period presentation. These condensed consolidated financial statements should be read in conjunction with the Stericycle, Inc. and Subsidiaries Consolidated Financial Statements and notes thereto for the year ended December 31, 2009,2010, as filed with our Annual Report on Form 10-K for the year ended December 31, 2009.2010. The results of operations for the ninethree months ended September 30, 2010March 31, 2011 are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2010.2011.
There were no material changes in the Company’s critical accounting policies since the filing of its 2010 Form 10-K. As discussed in the 2010 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.
NOTE 2 – ACQUISITIONS AND DIVESTITUREDIVESTITURES
During the quarter ended March 31, 2010,2011, we completed nine acquisitions. Domestically, we acquired selected assets of two domesticthree regulated waste businesses,businesses. Internationally, we acquired 100% of the stock of two regulated waste businesses in the UK 70%and two regulated waste businesses in Romania, selected assets of a regulated waste business in Ireland, and 80% of the stock of a regulated waste business in Brazil,Chile.
The following table summarizes the aggregate purchase price paid for acquisitions and 100%other adjustments of consideration to be paid on acquisitions during the stock of a regulated waste business in Chile. We also increased our majority share in a previous acquisition in Chile from 60% to 67%.quarter ended March 31, 2011:
In thousands | ||||
Cash | $ | 19,543 | ||
Promissory notes | 1,100 | |||
Adjustments to consideration | (370 | ) | ||
Total purchase price | $ | 20,273 |
During the quarter ended June 30, 2010, we completed four acquisitions. Domestically, we acquired all of the stock of two regulated waste businesses. Internationally, we acquired all of the stock of one regulated waste business located in the United Kingdom and selected assets of a regulated waste business located in Mexico.
During the quarter ended September 30, 2010, we completed six acquisitions. Domestically, we acquired selected assets of two regulated waste businesses and all of the stock of a third regulated waste business. Internationally, we acquired three regulated waste businesses: 100% of the stock of a company in Portugal, 100% of the stock of a company in Japan, and 88.2% of the stock of a second company in Japan.
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The aggregate purchase price of our acquisitions during the nine months ended September 30, 2010 was approximately $134.6 million, of which approximately $95.6 million was paid in cash, $31.6 million was paid by the issuance of promissory notes, and $7.4 million was recorded as contingent consideration. For financial reporting purposes,March 31, 2011, we recognized $98.2$10.8 million in goodwill of which $14.3$7.8 million is tax deductible. Wewas assigned to our United States reporting segment and $3.0 million to our Foreign Countries reporting segment. Approximately $5.6 million of the good will recognized $66.2during the quarter will be deductible for income taxes. During the quarter ended March 31, 2011, we recognized $11.9 million in intangible assets of which $48.2$11.8 million haverepresents the estimated fair value of acquired customer relationships with amortizable lives of 15-40 years, $0.9 million have amortizable lives of 3-5 years, and $17.1 million are indefinite lived.years. The allocation of the acquisition price paid is preliminary pending completion of certain intangible asset valuations and completion accounts.
In thousands | Preliminary Allocation of 2010 Acquisitions | Adjustments During Allocation Period | Total Allocations | |||||||||
Fixed assets | $ | 14,236 | $ | (1,232 | ) | $ | 13,004 | |||||
Intangibles | 66,216 | 16,843 | 83,059 | |||||||||
Goodwill | 98,166 | (14,600 | ) | 83,566 | ||||||||
Net other assets | 7,606 | 694 | 8,300 | |||||||||
Debt | (16,412 | ) | — | (16,412 | ) | |||||||
Net deferred tax liabilities | (18,466 | ) | (1,556 | ) | (20,022 | ) | ||||||
Noncontrolling interests | (16,923 | ) | — | (16,923 | ) | |||||||
$ | 134,423 | $ | 149 | $ | 134,572 |
The resultsfollowing table summarizes the preliminary purchase price allocation for current period acquisitions and other adjustments to purchase price allocations during the quarter ended March 31, 2011:
In thousands | ||||
Fixed assets | $ | 2,859 | ||
Intangibles | 11,887 | |||
Goodwill | 10,849 | |||
Net other assets/ (liabilities) | (2,365 | ) | ||
Debt | (526 | ) | ||
Net deferred tax liabilities | (2,642 | ) | ||
Noncontrolling interests | 211 | |||
$ | 20,273 |
For financial reporting purposes, our 2011 and 2010 acquisitions were accounted for using the acquisition method of operations of these acquired businesses have been included in the consolidated statements of income from the dates of acquisition.accounting. These acquisitions resulted in recognition of goodwill in our financial statements reflecting the complementary strategic fitpremium paid to acquire businesses that the acquired businesses broughtwe believe are complementary to our company.existing operations and fit our strategy. During the nine month periodquarters ended September 30,March 31, 2011 and 2010, and 2009, the Company incurred $3.2$3.8 million and $5.4$0.8 million, respectively, of acquisition related expenses. These expenses are identified on our Condensed Consolidated Statements of Income as Acquisition expenses.
Our acquisition“acquisition expenses”. The purchase prices in excess of MedServe in Decemberacquired tangible assets for these acquisitions have been primarily allocated to goodwill and other intangibles and are preliminary pending completion of 2009 required us to divest certain acquired assets. These assets were sold for $8.0 million resulting in a second quarter pre-tax gain of $3.0 million. The following table describes the assets:intangible asset valuations.
In thousands | Asset Group Sold | |||
Fixed assets | $ | (1,565 | ) | |
Intangibles | (1,127 | ) | ||
Goodwill | (2,345 | ) | ||
Net other assets | (8 | ) | ||
$ | (5,045 | ) |
On September 24, 2010,April 18, 2011, we entered into a merger agreement for thecompleted our acquisition of Healthcare Waste Solutions, Inc., a Delaware corporation (“HWS”). HWS provides a resource management assessment and consulting program for all waste streams to healthcare providers and is also engaged in the collection, transportation, treatment and disposal of medical waste, universal waste and other regulated wastes, sharps management services, safety and compliance training, and other related businesses.
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The total merger consideration is $245was $237 million in cash, subject to the various adjustments including a reductionprovided for HWS’s indebtedness as ofin the closing date. The merger is subject to customary closing conditions and regulatory reviews, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.agreement. See Note 16 – Subsequent Events.
NOTE 3 – NEW ACCOUNTING STANDARDS
Accounting Standards Recently Adopted
ConsolidationRevenue Recognition
On January 1, 2010,2011, Stericycle adopted changes issued by the FASB related to amendments 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 a 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 any impact to our financial statements.
Accounting Standards not yet adopted
Revenue Recognition
In October 2009, the FASB issued an update to existing guidance on revenue recognition for arrangements with multiple deliverables. This update will allowallows companies 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 multiple element arrangements, the types of deliverables under the arrangements, the general timing of their delivery, and the significant factors and estimates used to determine 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 dothis new guidance did not expect anyhave a material impact to our financial statements upon adoption.statements.
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
NOTE 4 – FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sellfrom selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. TheFair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs)upon the lowest level of input that is available and (2) an entity’s own assumptions about market participant assumptions developed based onsignificant to the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjustedmeasurement:
Level 1– Quoted prices in active markets for identical assets or liabilities.
Level 2– Observable inputs other than quoted prices in active markets for identical assets orand liabilities, (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
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 inactive markets, that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3– Valuations based on inputsInputs that are supported by littlegenerally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or no market activity and that are significant to the fair value of the assets or liabilities.
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, the fair value measurement of a liability must reflect the nonperformance risk of an entity.liability.
Fair Value Measurements Using | ||||||||||||||||
In thousands | Total as of September 30, 2010 | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | ||||||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 20,627 | $ | 20,627 | $ | — | $ | — | ||||||||
Short-term investments | 18,632 | 18,632 | — | — | ||||||||||||
Total assets | $ | 39,259 | $ | 39,259 | $ | — | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Interest rate hedge (accrued liabilities) | 60 | — | 60 | — | ||||||||||||
Total liabilities | $ | 60 | $ | — | $ | 60 | $ | — |
In thousands Assets: Cash and cash equivalents Short-term investments Total assets Assets: Cash and cash equivalents Short-term investments Total assetsSTERICYCLE, INC. AND SUBSIDIARIES Total as of
March 31, 2011 Fair Value Measurements Using Level 1
Inputs Level 2
Inputs Level 3
Inputs $ 24,656 $ 24,656 $ 0 $ 0 19,768 19,768 0 0 $ 44,424 $ 44,424 $ 0 $ 0 Total as of
December 31, 2010 Level 1
Inputs Level 2
Inputs Level 3
Inputs $ 77,053 $ 77,053 $ 0 $ 0 18,471 18,471 0 0 $ 95,524 $ 95,524 $ 0 $ 0
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Fair Value Measurements Using | ||||||||||||||||
In thousands | 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 | — | — | ||||||||||||
Total assets | $ | 16,898 | $ | 16,898 | $ | — | $ | — | ||||||||
Liabilities: | ||||||||||||||||
Interest rate hedges (accrued liabilities) | $ | 1,165 | $ | — | $ | 1,165 | $ | — | ||||||||
Total liabilities | $ | 1,165 | $ | — | $ | 1,165 | $ | — |
Level 1: At September 30, 2010,March 31, 2011, we have $20.6$24.7 million in cash and cash equivalents, and $15.8 million in Certificatescertificates of Deposit,deposit, and $2.8$4.0 million in money market accounts, that we carry on our booksrecorded at fair value using Level 1 inputs. WeAt December 31, 2010, we had $77.1 million in cash and cash equivalents, $15.8 million in certificates of deposit, and $2.7 million in money market accounts. In 2010, we financed a portion of our Japan acquisition through local borrowings of ¥1.2 billion which required us to deposit the equivalent USD amount of $15.8 million in one year Certificatescertificates of Deposit intodeposit with an affiliated bank located in the United States. At December 31, 2009, we had $15.8 million in cash and cash equivalents and $1.1 million of short-term investments on our books at fair value using market price inputs.
Level 2: At September 30, 2010, we have an interest rate swap contract covering $25 million of our variable interest debt. The objective of the swap is to reduce the risk of volatile interest expense by fixing the rate. The interest rate hedge is designated as a cash flow hedge; the notional amount and all other significant terms of the hedge agreement are matched to the provisions and terms of the debt hedged. We apply hedge accounting to this instrument with changes in thehad no assets or liabilities measured at fair value of the hedge agreement recorded as a component of accumulated other comprehensive income. The fair value was determined using market dataLevel 2 inputs to calculate expected future interest rates. The cash streams attributable to the difference between expected future rates and the fixed rate payable are discounted to arrive at the fair value of the hedge. At September 30, 2010 andMarch 31, 2011 or December 31, 2009 the fair value of the interest rate hedges was recorded as a current liability of $60 thousand and $1.2 million, respectively.2010.
Level 3: We had no assets or liabilities measured at fair value using Level 3 inputs at September 30, 2010March 31, 2011 or December 31, 2009.2010.
Fair Value of Debt:Debt: At September 30,March 31, 2011, the fair value of the Company’s debt obligations was estimated at $999.9 million, compared to a carrying amount of $1.105 billion. At December 31, 2010, the fair value of the Company’s debt obligations was estimated at $960.1 million,$1.105 billion, compared to a carrying amount of $977.4 million. At December 31, 2009, the$1.103 billion. The fair value of the Company’s debt obligations was estimated at $985.0 million, compared to a carrying amount of $988.9 million. This fair value wasvalues were estimated using market interest rates for comparable instruments. The Company has no current plans to retire a significant amount of its debt prior to maturity.
There were no movements of items between fair value hierarchies.
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
NOTE 5 – DERIVATIVE INSTRUMENTS
As of September 30, 2010,At March 31, 2011, we have one interest rate swap contract, which expired in October 2010, covering $25 million of our borrowings outstanding under our senior credit facility. The objective of the hedge was to reduce the risk of volatile interest expense by fixing the rate.
The fair market of the hedge is recorded as a current liability of $60 thousand at September 30, 2010.
During the quarter ending September 30, 2010, we settled our Treasury Lock hedge related to our private debt placement. The settlement resulted in a cash payment of $4.6 million and is reflected on our Statement of Cash Flows within Financing Activities. This settlement amount will be amortized over the life of the related debt.had no derivative instruments.
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 2004. We have tax years open to examination in the US from 2007 and our subsidiaries in foreign countries have tax years open ranging from 2004 through 2009.2005.
The Company has recorded accruals to cover certain unresolved tax issues. Such uncertain tax positions taken on previously filed tax returns. Such liabilities relate to additional taxes, interest and interestpenalties 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 uncertain tax positions as deemed necessary.positions.
The total amount of unrecognized tax benefitspositions as of September 30, 2010 and DecemberMarch 31, 20092011 was $7.7$11.8 million, and $7.6 million, respectively, which included immaterial amounts ofincludes interest and penalties and is reflected as a liability on the balance sheet. The amount of unrecognized tax benefitspositions that, if recognized, would affect the effective tax rate is approximately $7.7$11.8 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 nine monthsquarter ended September 30, 2010:March 31, 2011:
In thousands | ||||
Unrecognized tax positions, January 1, 2010 | $ | 7,622 | ||
Net decreases- tax positions in prior period | (77 | ) | ||
Expiring by lapse of the Statute of Limitations | (1,123 | ) | ||
Net increases- tax positions in current period | 1,276 | |||
Unrecognized tax positions, September 30, 2010 | $ | 7,698 | ||
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
In thousands | ||||
Unrecognized tax positions, January 1, 2011 | $ | 9,132 | ||
Gross increases- tax positions in prior period | 1,341 | |||
Gross decreases- tax positions in prior period | (137 | ) | ||
Gross increases- current period tax positions | 1,507 | |||
Unrecognized tax positions, March 31, 2011 | $ | 11,843 | ||
NOTE 7 – STOCK BASED COMPENSATION
At September 30, 2010March 31, 2011, 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 |
(iv) | the 1997 Stock Option Plan, which expired in January 2007; |
(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 (ESPP), which our stockholders approved in May 2001. |
The following table sets forthpresents the total stock-based compensation expense resulting from stock option awards and the ESPP included in the consolidation statement of income:
In thousands | ||||||||
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Cost of revenues – stock option plan | $ | 26 | $ | 60 | ||||
Selling, general and administrative – stock option plan | 3,424 | 3,590 | ||||||
Selling, general and administrative – restricted stock unit | 158 | 0 | ||||||
Selling, general and administrative – ESPP | 255 | 224 | ||||||
Total pre-tax expense | $ | 3,863 | $ | 3,874 | ||||
As of March 31, 2011, there was $35.9 million of total unrecognized compensation expense, related to non-vested stock compensation:options, which is expected to be recognized over a weighted-average period of 2.08 years.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
In thousands | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Stock options | $ | 3,483 | $ | 3,604 | $ | 10,807 | $ | 10,362 | ||||||||
Employee Stock Purchase Plan | 217 | 166 | 634 | 499 | ||||||||||||
Total pre-tax expense | $ | 3,700 | $ | 3,770 | $ | 11,441 | $ | 10,861 | ||||||||
The following table sets forth the tax benefits related to stock compensation:
In thousands | In thousands | |||||||||||||||||||||||
Three Months Ended March 31, | ||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | 2011 | 2010 | |||||||||||||||||||||
In thousands | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||
Tax benefit recognized in income statement | $ | 1,486 | $ | 1,453 | $ | 4,547 | $ | 4,207 | ||||||||||||||||
Tax benefit recognized in the income statement | $ | 9,361 | $ | 1,528 | ||||||||||||||||||||
Excess tax benefit realized | 4,521 | (194 | ) | 17,951 | 357 | 8,092 | 1,163 |
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 the 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 ourthe 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.
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The assumptions that we used in the Black-Scholes model are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2010 | 2009 | 2010 | 2009 | 2011 | 2010 | |||||||||||||||||||
Expected term (in years) | 5.75 | 5.5 | 5.75 | 5.5 | 5.75 | 5.75 | ||||||||||||||||||
Expected volatility | 27.62 | % | 28.21 | % | 28.39 | % | 28.28 | % | 26.88 | % | 28.32 | % | ||||||||||||
Expected dividend yield | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||||||
Risk free interest rate | 1.71 | % | 2.69 | % | 2.38 | % | 2.12 | % | 2.28 | % | 2.46 | % |
The weighted average grant date fair value of the stock options granted during the three months ended March 31, 2011 and 2010 was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Weighted average grant date fair value of the stock options granted | $ | 15.36 | $ | 12.31 | $ | 13.43 | $ | 11.89 |
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Weighted average grant date fair value of the stock options granted | $ | 20.51 | $ | 13.13 |
Stock option activity for the ninethree months ended September 30, 2010,March 31, 2011, 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 | 1,304,681 | 52.56 | ||||||||||||||
Exercised | (1,627,108 | ) | 26.69 | |||||||||||||
Cancelled or expired | (125,577 | ) | 47.87 | |||||||||||||
Outstanding at September 30, 2010 | 6,939,749 | $ | 40.43 | 6.70 | $ | 202,391,523 | ||||||||||
Exercisable at September 30, 2010 | 3,512,385 | $ | 33.51 | 5.46 | $ | 126,326,580 | ||||||||||
Vested and expected to vest in the future at September 30, 2010 | 6,393,121 | $ | 39.69 | 6.57 | $ | 190,428,356 |
Number of Options | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||
(in years) | ||||||||||||||||
Outstanding at December 31, 2010 | 6,508,833 | $ | 41.86 | |||||||||||||
Granted | 917,668 | 84.94 | ||||||||||||||
Exercised | (459,758 | ) | 32.07 | |||||||||||||
Cancelled or expired | (111,470 | ) | 49.36 | |||||||||||||
Outstanding at March 31, 2011 | 6,855,273 | $ | 48.16 | 7.00 | $ | 277,678,609 | ||||||||||
Exercisable at March 31, 2011 | 3,664,417 | $ | 38.48 | 5.74 | $ | 183,900,934 | ||||||||||
Vested and expected to vest in the future at March 31, 2011 | 6,198,579 | $ | 46.62 | 6.81 | $ | 260,678,920 |
The restricted
Restricted stock units (RSUs), included above, account activity for 20,000 shares granted and $1.4 million ofthe three months ended March 31, 2011, was as follows:
Number of Options | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | ||||||||||
(in years) | ||||||||||||
Outstanding at December 31, 2010 | 20,000 | |||||||||||
Granted | 18,488 | |||||||||||
Forfeited | (3,250 | ) | ||||||||||
Outstanding at March 31, 2011 | 35,238 | 2.39 | $ | 3,124,553 | ||||||||
Exercisable at March 31, 2011 | 0 | 0.00 | $ | 0.00 | ||||||||
Vested and expected to vest in the future at March 31, 2011 | 26,753 | 2.36 | $ | 2,372,152 |
The total exercise intrinsic value which have a weighted average contractual life of 2.4 years.represents the total pre-tax value (the difference between the sales price on that trading day in the quarter ended March 31, and the exercise price associated with the respective option).
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
In thousands | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Total intrinsic value of options exercised | $ | 14,485 | $ | 3,166 | $ | 56,318 | $ | 12,073 |
Intrinsic value is measured using the fair market value at the date of the exercise (for options exercised) or at September 30, 2010 (for outstanding options), less the applicable exercise price.
As of September 30, 2010, there was $24.4 million of total unrecognized compensation expense, related to non-vested stock options, which is expected to be recognized over a weighted average period of 1.69 years.
In thousands | ||||||||
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Total exercise intrinsic value of options exercised | $ | 24,274 | $ | 4,314 |
NOTE 8 – COMMON STOCK
During the quartersquarter ended March 31, 2011 we had no common stock repurchases. During the quarter ended March 31, 2010, and 2009, we repurchased on the open market, and subsequently cancelled, 207,114 and 536,346 shares of common stock respectively. Thewith a weighted average repurchase price wasof $54.36 and $47.59 per share, respectively.share.
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
During the quarters ended June 30, 2010 and 2009, we repurchased on the open market, and subsequently cancelled, 235,436 and 40,162 shares of common stock, respectively. The weighted average repurchase price was $55.22 and $48.51 per share, respectively.
During the quarters ended September 30, 2010 and 2009, we repurchased on the open market, and subsequently cancelled 308,588 and 848,169 shares of common stock, respectively. The weighted average repurchase price was $62.64 and $48.61 per share, respectively.
NOTE 9 – NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income per share:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
In thousands, except share and per share data | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Numerator: | ||||||||||||||||
Numerator for basic earnings per share | ||||||||||||||||
Net income attributable to Stericycle, Inc. | $ | 56,686 | $ | 46,526 | $ | 157,899 | $ | 131,083 | ||||||||
Denominator: | ||||||||||||||||
Denominator for basic earnings per share weighted average shares | 85,295,740 | 84,899,815 | 84,986,187 | 84,909,316 | ||||||||||||
Effect of diluted securities: | ||||||||||||||||
Employee stock options | 1,883,317 | 1,894,303 | 1,844,574 | �� | 1,918,310 | |||||||||||
Dilutive potential share | 1,883,317 | 1,894,303 | 1,844,574 | 1,918,310 | ||||||||||||
Denominator for diluted earnings per share-adjusted weighted average shares and after assumed conversions | 87,179,057 | 86,794,118 | 86,830,761 | 86,827,626 | ||||||||||||
Earnings per share – Basic | $ | 0.66 | $ | 0.55 | $ | 1.86 | $ | 1.54 | ||||||||
Earnings per share – Diluted | $ | 0.65 | $ | 0.54 | $ | 1.82 | $ | 1.51 | ||||||||
In thousands, except share and per share data Numerator: Numerator for basic earnings per share Net income attributable to Stericycle, Inc. Denominator: Denominator for basic earnings per share-weighted average shares Effect of diluted securities: Employee stock options Dilutive potential shares Denominator for diluted earnings per share-adjusted weighted average shares and after assumed exercises Earnings per share – Basic Earnings per share – DilutedSTERICYCLE, INC. AND SUBSIDIARIES Three Months Ended March 31, 2011 2010 $ 55,674 $ 48,119 85,459,302 84,766,721 2,067,381 1,806,516 2,067,381 1,806,516 87,526,683 86,573,237 $ 0.65 $ 0.57 $ 0.64 $ 0.56
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
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 and nine months ended September 30, 2010March 31, 2011 and 2009:2010:
In thousands | In thousands | |||||||||||||||||||||||
Three Months Ended March 31, | ||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | 2011 | 2010 | |||||||||||||||||||||
Net income | $ | 56,586 | $ | 48,634 | ||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
In thousands | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||
Net income | $ | 57,300 | $ | 46,563 | $ | 159,700 | $ | 131,231 | ||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||
Currency translation adjustments | 17,253 | (3,498 | ) | (632 | ) | 16,955 | 12,991 | (10,405 | ) | |||||||||||||||
Change in fair value of cash flow hedge, net of tax | 2,312 | 669 | 675 | 1,676 | ||||||||||||||||||||
Amounts reclassified into income, net of tax | 85 | 371 | ||||||||||||||||||||||
Other comprehensive income/ (loss) | 19,565 | (2,829 | ) | 43 | 18,631 | 13,076 | (10,034 | ) | ||||||||||||||||
Comprehensive income | $ | 76,865 | $ | 43,734 | $ | 159,743 | $ | 149,862 | 69,662 | 38,600 | ||||||||||||||
Less: net income attributable to noncontrolling interests | 614 | 37 | 1,801 | 148 | ||||||||||||||||||||
Less: net income attributable to non-controlling interests | 912 | 515 | ||||||||||||||||||||||
Comprehensive income attributable to Stericycle, Inc. | $ | 76,251 | $ | 43,697 | $ | 157,942 | $ | 149,714 | $ | 68,750 | $ | 38,085 | ||||||||||||
NOTE 11 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and identifiable indefinite lived intangible assets are not amortized, but are subject to an annual impairment test. Other intangible assets are amortized over their useful lives. We have determined that our customer relationships have useful lives from 15 to 40 years based upon the type of customer, with a weighted average remaining useful life of 30.1 years. We have covenants not-to-compete intangibles with useful lives from two to ten years, with a weighted average remaining useful life of 6.0 years. We have tradename intangibles with useful lives from 20 to 40 years, with a weighted average remaining useful life of 30.5 years. We have determined that our permits have indefinite lives due to our ability to renew these permits with minimal additional cost, and therefore they are not amortized.
We have two geographical reporting segments, United States“United States” and Foreign Countries,“Foreign Countries”, both of which have goodwill. The changes in the carrying amount of goodwill for the nine months ended September 30,since December 31, 2010 were as follows:follows by reporting segment:
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 | — | 844 | 844 | |||||||||
Sale of assets | (2,345 | ) | — | (2,345 | ) | |||||||
Changes in goodwill on 2009 acquisitions | (1,973 | ) | (12,627 | ) | (14,600 | ) | ||||||
Goodwill on 2010 acquisitions | 41,992 | 56,174 | 98,166 | |||||||||
Balance as of September 30, 2010 | $ | 1,190,823 | $ | 285,333 | $ | 1,476,156 | ||||||
In thousands | ||||||||||||
United States | Foreign Countries | Total | ||||||||||
Balance as of December 31, 2009 | $ | 1,153,149 | $ | 240,942 | $ | 1,394,091 | ||||||
Goodwill acquired during year | 128,954 | 74,049 | 203,003 | |||||||||
Sale of assets | (2,345 | ) | 0 | (2,345 | ) | |||||||
Changes due to currency fluctuation | 0 | 1,015 | 1,015 | |||||||||
Balance as of December 31, 2010 | $ | 1,279,758 | $ | 316,006 | $ | 1,595,764 | ||||||
Goodwill on 2011 acquisitions | 5,600 | 8,346 | 13,946 | |||||||||
Changes in goodwill on 2010 acquisitions | 2,190 | (5,287 | ) | (3,097 | ) | |||||||
Changes due to currency fluctuation | 0 | 9,891 | 9,891 | |||||||||
Balance as of March 31, 2011 | $ | 1,287,548 | $ | 328,956 | $ | 1,616,504 | ||||||
The changes into goodwill for 20092010 acquisitions are primarily due to the finalization of intangible valuations and allocation of goodwill to the asset group held for sale.
As of March 31 2011 and December 31, 2010, the values of the amortizable intangible assets were as follows:
In thousands | ||||||||||||||||||||||||
March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Value | Gross Carrying Amount | Accumulated Amortization | Net Value | |||||||||||||||||||
Covenants not-to-compete | $ | 10,844 | $ | 3,338 | $ | 7,506 | $ | 10,402 | $ | 2,952 | $ | 7,450 | ||||||||||||
Customer relationships | 319,276 | 26,386 | 292,890 | 304,175 | 23,177 | 280,998 | ||||||||||||||||||
Tradenames | 1,200 | 261 | 939 | 1,200 | 253 | 947 | ||||||||||||||||||
License agreements | 720 | 235 | 485 | 766 | 211 | 555 | ||||||||||||||||||
Other | 1,771 | 1,771 | 0 | 1,801 | 1,801 | 0 | ||||||||||||||||||
Total | $ | 333,811 | $ | 31,991 | $ | 301,820 | $ | 318,344 | $ | 28,394 | $ | 289,950 | ||||||||||||
In addition to the amortizable intangible assets above, at March 31, 2011 and December 31, 2010, we had $87.0 million and $85.2 million, respectively, of indefinite lived intangibles that consist of environmental permits.
During the quarterquarters ended June 30,March 31, 2011 and 2010, we performed our annual goodwill impairment evaluation for our three reporting units, Domestic Regulated Waste, Domestic Regulated Returns Management,the aggregate amortization expense was $3.3 million and Foreign Countries. We performed two impairment tests, one using a market approach and the other using an income approach. Both the market and income approaches indicated no impairment to goodwill to any of our three reporting units.
Market Approach: Our market approach begins by calculating the market capitalization of the Company using the average stock price for the prior 30 days and the outstanding share count at June 30, 2010. We then look at the Company’s Earnings Before Interest, Tax, Depreciation, and Amortization (“EBITDA”), adjusted for stock compensation expense and non-core operational expenses, such as a gain on sale of divested assets, for the prior twelve months. The calculated market capitalization is divided by the modified EBITDA to arrive at a valuation multiple. The fair value of each reporting unit is then calculated by taking the product of the valuation multiple and the
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
trailing twelve month modified EBITDA of that reporting unit. The fair value was then compared to the reporting units’ book value and determined to be in excess of the book value. We believe that starting with the fair value of the company as a whole is a reasonable measure as that fair value is then allocated to each reporting unit based on that reporting unit’s individual earnings. A sustained drop in our stock price would have a negative impact to our fair value calculations. A temporary drop in earnings of a reporting unit would have a negative impact to our fair value calculations.$2.0 million, respectively.
The results of our goodwill impairment test using the market approach indicated the fair value of our Domestic Regulated Waste and Foreign Countries reporting units exceeded book value by a substantial amount, in excess of 100% of book value. Our Regulated Returns Management reporting unit fair value exceeded book value in excess of 30%. We currently have $119.9 million of goodwill assigned to our Regulated Returns Management reporting unit.
Income Approach: The income approach uses expected future cash flows of each reporting unit and discounts those cash flows to a present value. Expected future cash flows are calculated using management assumptions of internal growth, capital expenditures, and cost efficiencies. Future acquisitions are not included in the expected future cash flows. We use a discount rate based on our Company calculated Weighted Average Cost of Capital which is adjustedestimated amortization expense for each of the next five years, assuming no additional amortizable intangible assets, is as follows for the years ended December 31:
In thousands | ||||
2011 | $ | 12,956 | ||
2012 | 12,739 | |||
2013 | 12,589 | |||
2014 | 12,308 | |||
2015 | 12,101 |
Future amortization expense may fluctuate depending on changes in foreign currency rates. The estimates for amortization expense noted above are based upon foreign exchange rates as of March 31, 2011.
NOTE 12 – DEBT
Long-term debt consisted of the following:
In thousands | ||||||||
March 31, 2011 | December 31, 2010 | |||||||
Obligations under capital leases | $ | 6,474 | $ | 6,330 | ||||
$850 million revolver weighted average rate 1.6%, due in 2012, variable rate debt at Libor +75 bps and base rate | 96,827 | 175,407 | ||||||
$215 million term loan, due in 2012, variable rate debt at Libor + 300bps | 76,938 | 80,969 | ||||||
$100 million Private Placement notes 5.64%, due in 2015 | 100,000 | 100,000 | ||||||
$175 million Private Placement notes 3.89%, due in 2017 | 175,000 | 175,000 | ||||||
$225 million Private Placement notes 4.47%, due in 2020 | 225,000 | 225,000 | ||||||
Acquisition notes weighted average rate of 3.2% and weighted average maturity of 5.0 years | 236,247 | 248,982 | ||||||
Foreign bank debt weighted average rate 5.5% and weighted average maturity of 3.9 years | 88,584 | 91,433 | ||||||
1,005,070 | 1,103,121 | |||||||
Less: current portion | 83,516 | 88,899 | ||||||
Total | $ | 921,554 | $ | 1,014,222 | ||||
Our $850.0 million senior credit facility maturing in August 2012, our $76.9 million term loan maturing in June 2012, our $100.0 million private placement notes maturing April 2015, our $175.0 million private placement notes maturing in October 2017 and our $225.0 million private placement notes maturing in October 2020, all require us to comply with various financial, reporting units basedand other covenants and restrictions, including a restriction on risk size premium and foreign country premium. Significant assumptions used individend payments. The financial debt covenants are the income approach include realization of future cash flowssame for the senior credit facility, the term loan credit agreement and the discount rate used to present value those cash flows.
The results of our goodwill impairment test using the income approach indicated the fair valueprivate placement notes. At March 31, 2011, we were in compliance with all of our reporting units exceeded book value by a substantial amount; in excessfinancial debt covenants.
As of 100%.March 31, 2011 and December 31, 2010, we had $173.9 million and $184.0 million, respectively, committed to outstanding letters of credit under our senior credit facility. The unused portion of the revolving credit facility as of March 31, 2011 and December 31, 2010 was $579.2 million and $490.6 million, respectively.
Guarantees
We completehave guaranteed a loan to JPMorganChase Bank N.A. on behalf of Shiraishi-Sogyo Co. Ltd (“Shiraishi”). Shiraishi is a customer in Japan that is expanding its medical waste management business and has a one year loan with a current balance of $6.0 million with JPMorganChase Bank N.A. that matures on May 2011. The loan with
JPMorganChase and our annual impairment analysisassociated guarantee is in the process of our indefinite lived intangibles (facility permits) duringbeing extended beyond May 2011. We also have extended notes receivable to Shiraishi for approximately $15.2 million in support of its medical waste business. These amounts are collateralized with the quarter ended December 31assets of each year.Shiraishi and related companies.
NOTE 1213 – GEOGRAPHIC INFORMATION
Management has determined that we have two reportable segments, United States (including(which includes Puerto Rico) and Foreign.Foreign Countries. Revenues 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.
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Detailed information for our United States reporting segment is as follows:
In thousands | In thousands | |||||||||||||||||||||||
Three Months Ended March 31, | ||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | 2011 | 2010 | |||||||||||||||||||||
In thousands | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||
Regulated waste management services | $ | 241,724 | $ | 212,509 | $ | 707,389 | $ | 622,136 | $ | 254,807 | $ | 229,090 | ||||||||||||
Regulated returns management services | 31,895 | 15,986 | 83,598 | 53,984 | ||||||||||||||||||||
Regulated returns and recall management services | 35,805 | 26,288 | ||||||||||||||||||||||
Total revenue | 273,619 | 228,495 | 790,987 | 676,120 | 290,612 | 255,378 | ||||||||||||||||||
Net interest expense | 7,033 | 7,841 | 22,053 | 21,145 | 9,685 | 7,613 | ||||||||||||||||||
Income before income taxes | 73,229 | 56,609 | 207,590 | 174,690 | 72,301 | 64,760 | ||||||||||||||||||
Income taxes | 26,494 | 20,145 | 76,243 | 65,994 | 29,150 | 23,943 | ||||||||||||||||||
Net income attributable to Stericycle, Inc. | $ | 46,735 | $ | 36,464 | $ | 131,347 | $ | 108,696 | $ | 43,151 | $ | 40,817 | ||||||||||||
Depreciation and amortization | $ | 9,009 | $ | 7,520 | $ | 26,395 | $ | 21,421 | $ | 9,449 | $ | 8,696 |
Detailed information for our Foreign Countries reporting segment is as follows:
In thousands | In thousands | |||||||||||||||||||||||
Three Months Ended March 31, | ||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | 2011 | 2010 | |||||||||||||||||||||
In thousands | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||
Regulated waste management services | $ | 89,369 | $ | 69,341 | $ | 254,912 | $ | 188,074 | $ | 107,514 | $ | 79,799 | ||||||||||||
Net interest expense | 1,394 | 1,373 | 4,095 | 4,145 | 1,503 | 1,270 | ||||||||||||||||||
Income before income taxes | 14,716 | 13,064 | 41,469 | 31,029 | 18,661 | 12,486 | ||||||||||||||||||
Income taxes | 4,151 | 2,965 | 13,116 | 8,494 | 5,226 | 4,669 | ||||||||||||||||||
Net income | 10,565 | 10,099 | 28,353 | 22,535 | 13,435 | 7,817 | ||||||||||||||||||
Less: net income attributable to noncontrolling interests | 614 | 37 | 1,801 | 148 | 912 | 515 | ||||||||||||||||||
Net income attributable to Stericycle, Inc. | $ | 9,951 | $ | 10,062 | $ | 26,552 | $ | 22,387 | $ | 12,523 | $ | 7,302 | ||||||||||||
Depreciation and amortization | $ | 4,495 | $ | 2,439 | $ | 12,115 | $ | 7,042 | $ | 5,654 | $ | 3,693 |
NOTE 1314 – 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 the acquisition of MedServe, Inc., which we closed on December 4, 2009. Our agreement with the DOJ and the States of Missouri and Nebraska agreement required 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 completed this required divestiture in May 2010 (see Note 2 – Acquisitions and Divestiture). 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 that is engaged in both the collection and treatment of infectious waste in Kansas, Missouri, Nebraska or Oklahoma.
During the quarter ended June 30, 2010, we entered into a settlement of litigation related to an acquisition agreement for $0.9 million.
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
NOTE 14 – 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 one year loan with a current balance of $5.8 million with JPMorganChase Bank N.A. that expires in May 2011. We also have extended notes receivable to Shiraishi for approximately $15.2 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 December of 2009, we announced the consolidation of operations within our Returns Management Servicesreturns and recall management services (“RMS”) business. This consolidation will resultresulted in the closure of our facilities in Boynton Beach, Florida and Conyers, Georgia. The operations of those facilities will behave been moved to our Indianapolis, Indiana location. We have recognized expense of $1.6 million during the fourth quarter of 2009, $0.7$0.1 million during the first quarter of 2010, $1.1 million during the second quarter of 2010, and $0.2 million during the third quarter of 2010 related to this restructuring. We have an accrual balance of $0.4 million related to the restructuring at September 30, 2010.2011. We estimate immaterial additional expense during the remainder of 2010.2011. We believe this restructuring will allow us to maximize the efficiency of our Returns Management ServicesRMS business at a single location and management infrastructure. infrastructure
In additionDecember 2010, we reorganized the structure of our international management group in order to the Returns Management Services restructuring charges, weleverage strong local management, resulting in employee severance and other charges. We recognized $0.5$0.1 million in expenses duringexpense related to this restructuring in the secondfirst quarter of 20102011. We had $0.9 million accrual remaining related to this reorganization at March 31, 2011, which will be paid primarily during 2011 with some additional disbursements in 2012.
The following tables below highlight the consolidationpre-tax charges and changes in the reserves for the quarter ended March 31, 2011 and for the year ended December 31, 2010. All charges related to these costs are reflected on our Consolidated Statement of some redundant plant operations.Income within “Restructuring costs” for both costs of revenue and selling, general, and administrative expenses.
In thousands | ||||||||||||||||
Beginning Reserve at 01/01/11 | Charges for the Quarter Ended 3/31/11 | Cash Paid | Ending Reserve at 3/31/11 | |||||||||||||
Employee severance | $ | 1,835 | $ | 125 | $ | (1,102 | ) | $ | 858 | |||||||
Other costs | 217 | 133 | (311 | ) | 39 | |||||||||||
Non-cash items | ||||||||||||||||
Employee severance | 0 | 0 | 0 | |||||||||||||
Other costs | 0 | 0 | 0 | |||||||||||||
Total | $ | 2,052 | $ | 258 | $ | (1,413 | ) | $ | 897 | |||||||
Charges for Employee severance Other costs Non-cash items Employee severance Other costs Total Beginning
Reserve at
01/01/10
the Year
Ended
12/31/10 Cash Paid Ending
Reserve at
12/31/10 $ 666 $ 3,100 $ (1,931 ) $ 1,835 6 1,080 (869 ) 217 0 3,266 0 0 0 925 0 0 $ 672 $ 8,371 $ (2,800 ) $ 2,052
NOTE 16 – SUBSEQUENT EVENT
The Company evaluated subsequent events throughOn April 18, 2011, we completed the dateacquisition of filing this Quarterly Report on Form 10-Q.
On August 18,HWS pursuant to the merger agreement, dated as of September 24, 2010, we entered into a note purchaseas amended. Completion of the merger followed our agreement with 39 institutional purchasers pursuant to which we agreed to issuethe U.S. Department of Justice and sellthe State of New York providing for clearance of the transaction under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
The total merger consideration was $237 million in cash, subject to the purchasers $175.0 million of our new 3.89% Series A seven-year unsecured senior notes and $225.0 million of our new 4.47% Series B 10-year unsecured senior notes. Closingvarious adjustments provided for in the merger agreement, including a reduction for HWS’s indebtedness as of the note purchase agreement occurred on October 15, 2010.
The Series A notes bear interest at the fixed rate of 3.89% per annum, and the Series B notes bear interest at the fixed rate of 4.47% per annum. Interest is payable in arrears semi-annually on April 15 and October 15 beginning on April 15, 2011. The principal of the Series A notes is payable at the maturity of the notes on October 15, 2017, and the principal of the Series B notes is payable at the maturity of the notes on October 15, 2020. The notes are unsecured obligations.
We applied $100.0closing date. In addition, $10 million of the proceeds from the salemerger consideration was deposited into escrow to cover indemnification obligations of the notes to repay a portion of our term loansHWS shareholders and applied $300.0 million of“in-the-money” option holders under the proceeds to reduce our borrowings under our revolving credit facility.merger agreement.
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 476,000over 489,000 customers throughout the United States, Argentina, Brazil, Canada, Chile, Ireland, Japan, Mexico, Portugal, Puerto Rico, Romania, and the United Kingdom. We have fully integrated networks including processing centers, and transfer and collection sites. We use these networks to provide a broad range of services to our customers including regulated waste management services, and regulated return management services. Regulated waste management services include regulated waste removal services, sharps management services, products and services 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. 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 Japan.South Africa.
There were no material changes in the Company’s critical accounting policies since the filing of its 20092010 Form 10-K. As discussed in the 20092010 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 2011 include the three months ended September 30, 2010:following:
revenues for the first quarter 2011 grew to $363.0$398.1 million, a 21.9%18.8% increase over $297.8$335.2 million for the thirdfirst quarter 2009;2010;
third quarter gross margins decreased to 45.8% in 2011 from 46.3% in 2010 from 47.3% in 2009;2010;
operating income was $96.0 million, a 20.8% increase from $79.5before acquisition-related costs and restructuring charges increased 19.5% to $107.2 million for 2009;
we incurred a net $2.1the first quarter 2011 from $89.7 million in non-core operational pre-tax expenses, and;the first quarter 2010; and
cash flow from operations was $76.1 million.
Highlights of the nine months ended September 30, 2010:
revenues grew to $1.05 billion, a 21.0% increase over $864.2 million for 2009;
gross margins decreased to 46.4% from 46.9% in 2009;
operating income was $276.8 million, a 18.7% increase from $233.3 million for 2009;
we incurred a net $3.6 million in non-core operational pre-tax expenses, and;
cash flow from operations was $205.4$65.6 million.
THREE MONTHS ENDED SEPTEMBER 30, 2010MARCH 31, 2011 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2009MARCH 31, 2010
The following summarizes the Company’s operations:
Three Months Ended September 30, | ||||||||||||||||||||||||||||||||
In thousands, except per share data | 2010 | 2009 | In thousands, except per share data | |||||||||||||||||||||||||||||
$ | % | $ | % | Three Months Ended March 31, | ||||||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||||||||||
$ | % | $ | % | |||||||||||||||||||||||||||||
Revenues | $ | 362,988 | 100.0 | $ | 297,836 | 100.0 | $ | 398,126 | 100.0 | $ | 335,177 | 100.0 | ||||||||||||||||||||
Cost of revenues | 185,515 | 51.1 | 150,272 | 50.5 | 205,816 | 51.7 | 170,570 | 50.9 | ||||||||||||||||||||||||
Depreciation | 9,818 | 2.5 | 8,862 | 2.6 | ||||||||||||||||||||||||||||
Restructuring costs | 185 | 0.1 | — | — | 62 | 0.0 | 428 | 0.1 | ||||||||||||||||||||||||
Depreciation | 9,190 | 2.5 | 6,647 | 2.2 | ||||||||||||||||||||||||||||
Total cost of revenues | 194,890 | 53.7 | 156,919 | 52.7 | 215,696 | 54.2 | 179,860 | 53.7 | ||||||||||||||||||||||||
Gross profit | 168,098 | 46.3 | 140,917 | 47.3 | 182,430 | 45.8 | 155,317 | 46.3 | ||||||||||||||||||||||||
Selling, general and administrative expenses | 65,033 | 17.9 | 54,312 | 18.2 | 69,972 | 17.6 | 62,470 | 18.6 | ||||||||||||||||||||||||
Depreciation | 1,796 | 0.5 | 1,878 | 0.6 | 1,938 | 0.5 | 1,552 | 0.5 | ||||||||||||||||||||||||
Amortization | 2,518 | 0.7 | 1,434 | 0.5 | 3,347 | 0.8 | 1,975 | 0.6 | ||||||||||||||||||||||||
Total selling, general and administrative expenses | 69,347 | 19.1 | 57,624 | 19.3 | 75,257 | 18.9 | 65,997 | 19.7 | ||||||||||||||||||||||||
Acquisition expenses | 1,891 | 0.5 | 3,478 | 1.2 | 3,798 | 1.0 | 800 | 0.2 | ||||||||||||||||||||||||
Integration expenses | 790 | 0.2 | 282 | 0.1 | 766 | 0.2 | 1,149 | 0.3 | ||||||||||||||||||||||||
Restructuring costs and plant closure expense | 31 | 0.0 | — | — | ||||||||||||||||||||||||||||
Restructuring costs | 196 | 0.0 | 239 | 0.1 | ||||||||||||||||||||||||||||
Income from operations | 96,039 | 26.5 | 79,533 | 26.7 | 102,413 | 25.7 | 87,132 | 26.0 | ||||||||||||||||||||||||
Net interest expense | 8,427 | 2.3 | 9,214 | 3.1 | 11,188 | 2.8 | 8,883 | 2.7 | ||||||||||||||||||||||||
Income tax expense | 30,645 | 8.4 | 23,110 | 7.8 | 34,376 | 8.6 | 28,612 | 8.5 | ||||||||||||||||||||||||
Net income | 57,300 | 15.8 | 46,563 | 15.6 | 56,586 | 14.2 | 48,634 | 14.5 | ||||||||||||||||||||||||
Less: net income attributable to noncontrolling interests | 614 | 0.2 | 37 | 0.0 | 912 | 0.2 | 515 | 0.2 | ||||||||||||||||||||||||
Net income attributable to Stericycle, Inc. | $ | 56,686 | 15.6 | $ | 46,526 | 15.6 | $ | 55,674 | 14.0 | $ | 48,119 | 14.4 | ||||||||||||||||||||
Earnings per share- diluted | $ | 0.65 | $ | 0.54 | $ | 0.64 | $ | 0.56 |
Revenues: Our revenues increased $65.1$62.9 million, or 21.9%18.8%, to $363.0$398.1 million in 20102011 from $297.8$335.2 million in 2009.2010. Domestic revenues increased $45.1$35.2 million or 19.7%,13.8% to $273.6$290.6 million from $228.5$255.4 million in 20092010 as internal revenue growth for domestic small account customers increased by $13.1$10.9 million, or approximately 10%8%, and internal
revenue growth for large quantity customers increased by $4.7$4.0 million, or approximately 6%5%. Internal revenuesrevenue growth for returns management increased by $15.9 million. Internal revenues excludes acquisitions less than one year old. Total regulated waste$8.7 million, and returns management domestic acquisitions less than one year old contributed approximately $11.4$11.6 million to the increase in domestic revenues.
International revenues increased $20.0$27.7 million, or 28.9%34.7%, to $89.4$107.5 million from $69.3$79.8 million in 2009.2010. Internal growth in the international segment contributed $3.9$6.5 million, or approximately 6%over 8%, to the increase in increased revenues. Internal growth excludesinternational revenues, before taking into consideration the effect of foreign exchange rates and acquisitions less than one year old.acquisitions. The effect of exchange rate fluctuations negativelyfavorably impacted international revenues approximately $1.6$2.3 million while acquisitions less than one year old contributed an additional $17.7$18.9 million in international revenues.
Cost of Revenues: Our cost of revenues increased $38.0$35.8 million, or 24.2%19.9%, to $194.9$215.7 million during 20102011 from $156.9$179.9 million during 2009.2010. Our domestic cost of revenues increased $23.2$17.4 million, or 20.2%13.5%, to $137.8$146.4 million from $114.6$129.0 million in 20092010 as a result of costs related to a proportional increase in revenues from acquisitions and internal growth. Our international cost of revenues increased $14.8$18.4 million, or 35.0%36.1%, to $57.1$69.3 million from $42.3$50.9 million in 20092010 primarily driven by the impact of exchange rates and impact from integration ofand acquisitions. Our company wide gross margin percentage decreased to 45.8% during 2011 from 46.3% during 2010 from 47.3% during 2009 primarily due to slightly higher fuel and energy costs as well as integration of lower margin newly acquired revenues and higher Regulated Returns Management revenues, offset by improvements in the base business margins.revenues.
Selling, General and Administrative Expenses: Selling, general and administrative (“SG&A”) expenses increased approximately $11.7$9.3 million, or 20.4%14.0%, to $69.4$75.3 million, for the quarter ended September 30, 2010March 31, 2011 from $57.6$66.0 million for the comparable quarter in 2009 primarily as investment spending supported the increase in revenues and acquisition related SG&A spending.2010. As a percentage of revenue, these costs decreased by 0.2%0.8% for the quarter ended September 30, 2010March 31, 2011 compared to the same period in 2009.2010. Depreciation expense as a percentage of revenue was 0.5% in both 2011 and 2010. Amortization expense, as a percentage of revenue, increased to 0.8% in the first quarter of 2011 from 0.6% in the same period in 2010 due to additional acquisitions, and related increase in intangibles and related amortization.
Domestically, thirdour first quarter 2011 SG&A expenses increased $8.2$5.1 million or 18.1%, to $53.6$56.5 million from $45.4$51.4 million in the same period in 2009.last year. As percentage of revenues, SG&A was lower at 19.6%19.4% in the thirdfirst quarter of 20102011 compared to 19.9% in 2009. As a percentage of revenues, amortization expense of acquired intangible assets increased by 0.2% while other expenses decreased by 0.55%. There was no single factor that was a major contributor to the decrease in SG&A.
Internationally, third quarter SG&A expenses increased $3.6 million or 29.5% to $15.8 million from $12.2 million20.1% in the same period last year.in 2010.
Internationally, our first quarter 2011 SG&A increased $4.2 million to $18.8 million from $14.6 million during the same period in 2010, mostly due to acquisitions and related higher expenses. As a percentage of revenues, SG&A was 17.7%lower at 17.4% in 2010the first quarter of 2011 compared to 17.6%18.3% in 2009. The increasethe same period in SG&A was partially due to our acquisitions in Japan and Portugal, which have slightly higher SG&A expenses. Higher amortization expense related to recognized intangible assets from acquisitions and investment for our Clinical Services program also contributed to the increase in SG&A.2010.
Income from Operations: Income from operations increased $15.3 million to $96.0$102.4 million for the quarter ended September 30, 2010March 31, 2011 from $79.5$87.1 million for the comparable quarter in 2009,2010, an increase of 20.8%17.5%. During the quarter ended SeptemberMarch 31, 2011, we recognized $3.8 million in acquisition expenses, $0.8 million expenses related to the integration of new acquisitions, and $0.3 million of restructuring costs. During the
quarter ended March 31, 2010, we recognized $1.9$0.8 million in acquisition expenses, $1.1 million related to the integration of new acquisitions, and $0.2$0.7 million of restructuring costs ofcosts.
Domestically, our regulated returns management service business. Duringincome from operations increased $8.7 million, or 11.8%, to $82.2 million during the quarter ended September 30, 2009 we recognized $3.5March 31, 2011 from $73.5 million during the same period in expenses related2010. Internationally, our income from operations increased $6.6 million, or 48.5%, to acquisitions.
$20.2 million during the quarter ended March 31, 2011 from $13.6 million during the same period in 2010.
Net Interest Expense: Net interest expense decreasedincreased to $8.4$11.2 million during the quarter ended September 30, 2010March 31, 2011 from $9.2$8.9 million during the comparable quarter in 2009. Our interest expense was higher in 20092010 due to incremental expenses related to threehigher interest rate swap contracts, two of which expired prior to the third quarter of 2010.rates.
Income Tax Expense: Income tax expense increased to $30.6$34.4 million for the quarter ended September 30, 2010March 31, 2011 from $23.1$28.6 million for the comparable quarter in 2009. In September 2010 and 2009, we recognized $1.2 million and $1.8 million, respectively; of tax benefits related2010. The increase was primarily due to prior years unrecognized tax positions, which positively impacted our diluted earnings per share by $0.01 and $0.02, respectively.higher taxable income. The effective tax rates for the quarters ended September 30,March 31, 2011 and 2010 were 37.8% and 2009 were 34.8% and 33.2%, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2010 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2009
The following summarizes the Company’s operations:
Nine Months Ended September 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
In thousands, except per share data | $ | % | $ | % | ||||||||||||
Revenues | $ | 1,045,899 | 100.0 | $ | 864,194 | 100.0 | ||||||||||
Cost of revenues | 532,625 | 50.9 | 438,484 | 50.7 | ||||||||||||
Restructuring costs | 1,339 | 0.1 | — | — | ||||||||||||
Depreciation | 26,983 | 2.6 | 20,456 | 2.4 | ||||||||||||
Total cost of revenues | 560,947 | 53.6 | 458,940 | 53.1 | ||||||||||||
Gross profit | 484,952 | 46.4 | 405,254 | 46.9 | ||||||||||||
Selling, general and administrative expenses | 191,067 | 18.3 | 158,090 | 18.3 | ||||||||||||
Depreciation | 4,875 | 0.5 | 4,187 | 0.5 | ||||||||||||
Amortization | 6,652 | 0.6 | 3,820 | 0.4 | ||||||||||||
Total selling, general and administrative expenses | 202,594 | �� | 19.4 | 166,097 | 19.2 | |||||||||||
Acquisition expenses | 3,247 | 0.3 | 5,418 | 0.6 | ||||||||||||
Integration expenses | 3,253 | 0.3 | 466 | 0.1 | ||||||||||||
Restructuring costs and plant closure expense | 1,107 | 0.1 | — | — | ||||||||||||
Litigation settlement | 937 | 0.1 | — | — | ||||||||||||
Gain on sale of assets | (2,955 | ) | -0.3 | — | — | |||||||||||
Income from operations | 276,769 | 26.5 | 233,273 | 27.0 | ||||||||||||
Net interest expense | 26,148 | 2.5 | 25,290 | 2.9 | ||||||||||||
Income tax expense | 89,359 | 8.5 | 74,488 | 8.6 | ||||||||||||
Net income | 159,700 | 15.3 | 131,231 | 15.2 | ||||||||||||
Less: net income attributable to noncontrolling interests | 1,801 | 0.2 | 148 | 0.0 | ||||||||||||
Net income attributable to Stericycle, Inc. | $ | 157,899 | 15.1 | $ | 131,083 | 15.2 | ||||||||||
Earnings per share- diluted | $ | 1.82 | $ | 1.51 |
Revenues: Our revenues increased $181.7 million, or 21.0%, to $1.05 billion in 2010 from $864.2 million in 2009. Domestic revenues increased $114.9 million, or 17.0%, to $791.0 million from $676.1 million in 2009 as internal revenue growth for domestic small account customers increased by $34.7 million, or approximately 9%, and internal revenue growth for large quantity customers increased by $12.9 million, or approximately 6%. Internal revenues for returns management increased by $29.6 million resulting from larger recalls in the quarter. Internal revenues exclude acquisitions less than one year old. Total domestic regulated waste and returns management acquisitions less than one year old contributed approximately $37.7 million to the increase in domestic revenues.
International revenues increased $66.8 million, or 35.5%, to $254.9 million in 2010 from $188.1 million in 2009. Internal growth in the international segment contributed $13.3 million, or approximately 7% in increased revenues. Internal growth excludes the effect of exchange rates and acquisitions less than one year old. The effect of exchange rate fluctuations favorably impacted international revenues approximately $3.5 million and acquisitions less than one year old contributed an additional $50.0 million in international revenues.
Cost of Revenues: Our cost of revenues increased $102.0 million, or 22.2%, to $560.9 million during 2010 from $458.9 million during 2009. Our domestic cost of revenues increased $59.1 million, or 17.4%, to $399.0 million from $339.9 million in 2009 as a result of costs related to a proportional increase in revenues from acquisitions and internal growth. Our international cost of revenues increased $42.9 million, or 36.0% to $161.9 million from $119.0 million in 2009 as a result of costs related to a proportional increase in revenues, partially driven by the impact of exchange rates. Our company wide gross margin percentage decreased to 46.4% during 2010 from 46.9% during 2009 due to slightly higher energy expenses and the inclusion of lower margin acquired revenues.
Selling, General and Administrative Expenses: SG&A expenses increased $36.5 million, or 22.0%, to $202.6 million, for the nine months ended September 30, 2010 from $166.1 million for the comparable period in 2009. As a percentage of revenue, these costs increased by 0.2% for the nine months ended September 30, 2010 compared to the same period in 2009 primarily due to higher expensing of stock options.
Domestically, SG&A increased $23.5 million in 2010, or 17.6%, to $156.7 million from $133.2 in 2009. The increase was primarily due to SG&A expenses related to the acquired revenues, higher amortization and stock option expenses, market penetration for our Pharmaceutical Waste programs, and investment in the Steri-Safe services.
Internationally, SG&A increased $13.0 million in 2010, or 39.5% to $45.9 million from $32.9 million in 2009. As a percentage of revenues, SG&A was 18.0% in 2010 and 17.5% in 2009. The increase in SG&A was partially due to our acquisitions in the UK, Brazil, and Japan, which have slightly higher SG&A expenses. Higher amortization expense related to recognized intangible assets from acquisitions and investment for our Clinical Services program also contributed to the increase in SG&A.
Income from Operations: Income from operations increased to $276.8 million for the nine months ended September 30, 2010 from $233.3 million for the comparable period in 2009, an increase of 18.6%. During the nine months ended September 30, 2010, we recognized $3.2 million in expenses related to acquisitions, $2.0 million of restructuring costs of our regulated returns management service business, $0.5 million plant closure expense, and litigation settlement of $0.9 million, partially offset by a $3.0 million gain on sale of assets related to the MedServe divestiture. These non-core operational expenses totaled $3.6 million on pre-tax basis. During the nine months ended September 30, 2009, we recognized $5.4 million in expenses related to acquisitions.
Net Interest Expense: Net interest expense increased to $26.1 million during the nine months ended September 30, 2010 from $25.3 million during the comparable period in 2009 due to increased borrowings.
Income Tax Expense: Income tax expense increased to $89.4 million for the nine months ended September 30, 2010 from $74.5 million for the comparable period in 2009. The increase was due to higher taxable income partially offset by a lower effective tax rate. In September 2010 and 2009, we recognized $1.2 million and $1.8 million, respectively; of tax benefits related to prior years unrecognized tax positions which positively impacted our diluted earnings per share by $0.01 and $0.02, respectively. The effective tax rates for the nine months ended September 30, 2010 and 2009 were 35.9% and 36.2%37.0%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our $850$850.0 million senior credit facility maturing in August 2012, our $206.9$76.9 million term loan maturing in June 2012, and our $100$100.0 million private placement notes maturing April 2015, our $175.0 million private placement note maturing in October 2017 and our $225.0 million private placement notes maturing in October 2020, all require us to comply with various financial, reporting 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 September 30, 2010,March 31, 2011, we were in compliance with all of our financial debt covenants.
As of September 30, 2010,March 31, 2011, we had $375.1$96.8 million of borrowings outstanding under our $850 million senior unsecured credit facility, which includes foreign currency borrowings of $31.1$51.3 million. We also had $185.2$173.9 million committed to outstanding letters of credit under this facility. The unused portion of the revolving credit facility as of September 30, 2010March 31, 2011 was $289.7$579.2 million. At September 30, 2010,March 31, 2011, our interest rates on borrowings under our revolving credit facility were as follows:
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 0.75%.
The weighted average rate of interest on the unsecured revolving credit facility was 1.42%1.6% per annum.
As of September 30, 2010,March 31, 2011, we had $206.9$76.9 million term 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 September 30, 2010,March 31, 2011, the applicable margin was 3.00%3.0%. The weighted average rate of interest on the term loan was 3.56%3.25% per annum which includes the amounts under our interest rate hedge. WeAfter the first year, we are required to make quarterly principal payments ranging between 2% to 3%of 2.5% of the principal amount of the outstanding term loans, and the remainder at maturity.
As of September 30, 2010,March 31, 2011, we had $100.0$100 million outstanding 5.64% private placement notes which we entered into on April 15, 2008 with nine institutional 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.
At September 30, 2010,As of March 31, 2011, we had $295.4$175.0 million of 3.89% seven-year unsecured senior notes and $225.0 million of 10-year 4.47% unsecured senior notes.
At March 31, 2011, we had $331.3 million in other debt outstanding, which includes promissory notes issued in connection with acquisitions during 2004 through 2010,2011, other foreign subsidiary bank debt, and capital leases.
Working Capital: At September 30, 2010,March 31, 2011, our working capital increased by $29.4decreased $14.8 million to $43.2$45.4 million compared to $13.7$60.2 million at December 31, 2009. Working capital2010. Cash and cash equivalents at December 31, 2010 included $23.0 million that was used for recalled product reimbursement, offset by an equivalent amount in accrued liabilities. Approximately $16.9 million of those amounts were paid during the first quarter of 2011 and we used excess cash to pay down debt. Our receivables increased by $36.7 million for net accounts receivables related to higher sales, and by $17.5 million for short-term investments. In July 2010, we financed a portionin the first quarter of our Japan acquisition through local borrowings which required us to deposit2011 by $15.8 million in one year Certificates of Deposit into an affiliated bank locateddue to incremental revenues and acquisitions. Accrued liabilities decreased by $7.1 million, primarily due to compensation expense accruals and short term deferred acquisition payment accruals, in the United States (see Note 4 – Fair Value Measurements). Working capitalform of notes and deferred consideration, which decreased by $18.9 million for increases in current debt, which was used to fund acquisitions and stock repurchases. Working capital also decreased due to an increase in accrued liabilities of $14.6 million primarily related to acquisitions.$10.2 million.
Net Cash Provided or Used: Net cash provided by operating activities decreased $8.5$15.5 million, or 4.0%19.1%, to $205.4$65.6 million during the nine monthsquarter ended September 30, 2010March 31, 2011 compared to $213.9$81.1 million for the comparable period in 2009. Higher earnings in 2010 were offset by an increase in accounts receivables resulting from higher revenues and timing of revenues2010. In 2011, we had $16.9 million decrease in the quarter in our regulated returns business.cash used for recalled product reimbursements.
Net cash used in investing activities for the nine monthsquarter ended September 30, 2010March 31, 2011 was $140.7$32.1 million compared to $136.1$63.7 million in the comparable period in 2009.2010. The difference is mainly due to a $15.8 increase in short-term investments related to our acquisitions in Japan (see Note 4 – Fair Value Measurements) partially offset by $11.5decrease of $30.9 million paid less forspent on acquisitions and international investments in 2010.
the first quarter of 2011 as compared to the same period in the prior year.
Net cash used in financing activities was $53.7$87.7 million during the nine monthsquarter ended September 30, 2010March 31, 2011 compared to $70.2$7.9 million for the comparable period in 2009. A decrease2010. During the three months ended March 31, 2011, we repaid $86.0 million in borrowings on our senior credit facility. We had no repurchases of $26.4 million for the repurchase and cancellation ofour common stock overduring the prior year period, and a decrease of $163.0 million in debt repayments and financing fees was partially offset by a $215.0 million term loan placed in 2009.three months ended March 31, 2011.
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 theirits medical waste management business and has a one year loan with a current balance of $5.8$6.0 million with JPMorganChase Bank N.A. that expiresmatures on May 2011. The loan with JPMorganChase and our associated guarantee is in the process of being extended beyond May 2011. We also have extended notes receivable to Shiraishi for approximately $15.2 million in support of theirits medical waste business. These amounts are collateralized with the assets of Shiraishi and related companies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risks arising from changes in interest rates. As of September 30, 2010, we have one interest rate swap contract covering $25 million of our borrowings outstanding under our senior credit facility. The objective of the hedge is to reduce the risk of volatile interest expense by fixing the rate. The fair market of the hedge is recorded as a current liability of $60 thousand at September 30, 2010.
During the quarter ending September 30, 2010, we settled our Treasury Lock hedge related to our private debt placement. The settlement resulted in a cash payment of $4.6 million and is reflected on our Statement of Cash Flows within Financing Activities. This settlement amount will be amortized over the life of the related debt.
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 $6.1$2.4 million on a pre-tax basis.
We have exposure to foreign currency fluctuations. We have subsidiaries in tennine foreign countries whose functional currency is the local currency. Changes in foreign currency exchange rates could unfavorably impact our consolidated results of 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.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chairman 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 Chairman 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 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 Chairman 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 September 30, 2010,March 31, 2011, 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.
See Note 1314 - Legal Proceedings, in the Notes to the Condensed Consolidated Financial Statements (Item 1 of Part I).
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In May 2002 our Board of Directors authorized the Company to repurchase up to 6,000,000 shares of our common stock, in the open market or through privately negotiated transactions, at times and in amounts in the Company’s discretion.
In February 2005, at a time when we had purchased a total of 2,956,860 shares, the Board authorized us to purchase an additional 2,956,860 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.
In May 2008, at a time when we had purchased an additional 2,938,496 shares since the prior increase in authorization, the Board authorized us to purchase up to an additional 2,938,496 shares.
In November 2010, at a time when we had purchased an additional 4,312,820 shares since the prior increase in authorization, our Board of Directors authorized us to purchase up to an additional 4,312,820 shares, thereby again giving the Company the authority to purchase up to a total of 6,000,000 additional shares.
Under resolutions that our Board of Directors adopted in May 2002, February 2005, February 2007, May 2007, and May 2008 and November 2010, we have been authorized to purchase a cumulative total of 16,224,57820,537,398 shares of our common stock on the open market. As of September 30, 2010,March 31, 2011, we had purchased a cumulative total of 13,937,25514,647,122 shares.
The following table provides information about our purchases during the nine months ended September 30, 2010 of sharesWe had no repurchases of our common stock:stock during the three months ended March 31, 2011.
Issuer Purchase of Equity Securities
Period | Total Number of Shares (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 | ||||||||||||
April 1- April 30, 2010 | 100,656 | 54.37 | 100,656 | 2,730,691 | ||||||||||||
May 1- May 31, 2010 | 134,780 | 55.85 | 134,780 | 2,595,911 | ||||||||||||
June 1- June 30, 2010 | — | — | — | 2,595,911 | ||||||||||||
July 1- July 31, 2010 | 308,588 | 62.64 | 308,588 | 2,287,323 | ||||||||||||
August 1- August 31, 2010 | — | — | — | 2,287,323 | ||||||||||||
September 1- September 30, 2010 | — | — | — | 2,287,323 |
31.1 | Rules 13a-14(a)/15d-14(a) Certification of Mark C. Miller, Chairman 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 | |
32 | Section 1350 Certification of Mark C. Miller, Chairman and Chief Executive Officer, and Frank J.M. ten Brink, Executive Vice President and Chief Financial Officer |
101.INS XBRL | Instance Document | |
101.SCH XBRL | Taxonomy Extension Schema Document | |
101.CAL XBRL | Taxonomy Extension Calculation Linkbase Document | |
101.DEF XBRL | Taxonomy Definition Linkbase Document | |
101.LAB XBRL | Taxonomy Extension Label Linkbase Document | |
101.PRE XBRL | Taxonomy Extension Presentation Linkbase Document |
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: November 5, 2010May 10, 2011
STERICYCLE, INC.
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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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