UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004 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)
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 is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES [X] NO [ ],
As of November 3, 2004 there were 45,015,558 shares of the Registrant's Common Stock outstanding.
Stericycle, Inc.
Table of Contents
| PART I. Financial Information | Page No. |
| Item 1. Financial Statements | |
| Condensed Consolidated Balance Sheets as of September 30, 2004 (Unaudited) and December 31, 2003 | |
| Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2004 and 2003 (Unaudited) | |
| Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 (Unaudited) | |
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 3. Qualitative and Quantitative Disclosures about Market Risk | |
| Item 4. Controls and Procedures | |
| PART II. Other Information | |
| Item 1. Legal Proceedings | |
| Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities | |
| Item 6. Exhibits | |
| Signatures | |
| Certifications |
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
September 30, December 31
2004 2003
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 8,955 7,240
Short-term investments.......................................... 1,658 641
Accounts receivable, less allowance for doubtful
accounts of $4,579 in 2004 and $4,149 in 2003................. 77,000 59,711
Parts and supplies.............................................. 3,910 3,244
Prepaid expenses................................................ 6,013 7,339
Notes receivable................................................ 3,423 2,223
Deferred tax asset.............................................. 12,908 12,345
Other........................................................... 5,817 4,994
----------- -----------
Total current assets................................... 119,684 97,737
Property, plant and equipment, net.............................. 128,877 96,562
----------- -----------
Other assets:
Goodwill, net................................................... 527,003 464,946
Intangible assets, less accumulated amortization of
$7,288 in 2004 and $5,459 in 2003............................. 34,493 31,642
Notes receivable................................................ 9,517 7,717
Other........................................................... 8,269 8,858
----------- -----------
Total other assets............................................ 579,282 513,163
----------- -----------
Total assets........................................... $ 827,843 $ 707,462
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt............................... $ 7,968 $ 4,830
Accounts payable................................................ 19,217 15,741
Accrued liabilities............................................. 47,696 43,436
Deferred revenue................................................ 9,247 4,987
----------- -----------
Total current liabilities.............................. 84,128 68,994
----------- -----------
Long-term debt, net of current portion.......................... 189,668 163,016
Deferred income taxes........................................... 54,900 42,277
Other liabilities............................................... 5,698 4,411
Redeemable preferred stock:
Series A convertible preferred stock (par value $.01 share,
75,000 shares authorized, 22,799 outstanding in 2003,
liquidation preference of $24,814 at December 31, 2003) -- 20,944
Common shareholders' equity:
Common stock (par value $.01 per share, 80,000,000
shares authorized, 45,146,098 issued and outstanding in
in 2004, 41,868,515 issued and outstanding in 2003)........... 452 420
Additional paid-in capital...................................... 318,173 290,631
Accumulated other comprehensive income.......................... (534) 530
Retained earnings............................................... 175,358 116,239
----------- -----------
Total shareholders' equity...................................... 493,449 407,820
----------- -----------
Total liabilities and shareholders' equity.................... $ 827,843 $ 707,462
=========== ===========
The accompanying notes are an integral part of these financial statements
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2004 2003 2004 2003
----------- ------------ ----------- ------------
Revenues........................... $ 135,989 $ 113,228 $ 377,338 $ 338,674
Costs and expenses:
Cost of revenues................. 71,806 60,369 197,037 183,210
Selling, general and
administrative expenses........ 19,253 16,781 54,805 49,259
Depreciaton and amortization..... 6,324 4,243 16,244 12,542
Write off of fixed assets........ -- -- 1,155 --
Acquisition related costs........ 392 216 586 430
----------- ----------- ----------- -----------
Total costs and expenses...... 97,775 81,609 269,827 245,441
----------- ----------- ----------- -----------
Income from operations............. 38,214 31,619 107,511 93,233
----------- ----------- ----------- -----------
Other income (expense):
Interest income.................. 168 232 286 492
Interest expense................. (3,266) (2,829) (8,379) (10,141)
Loan amendment fees (2004)/
debt extinguishment fees (2003) -- -- (333) (3,268)
Other expense.................... (275) (641) (1,242) (1,847)
----------- ----------- ----------- -----------
Total other income (expense).. (3,373) (3,238) (9,668) (14,764)
----------- ----------- ----------- -----------
Income before income taxes......... 34,841 28,381 97,843 78,469
Income tax expense................. 13,713 11,210 38,724 31,095
----------- ----------- ----------- -----------
Net income......................... $ 21,128 $ 17,171 $ 59,119 $ 47,374
=========== =========== =========== ===========
Earnings per share - Basic......... $ 0.47 $ 0.41 $ 1.33 $ 1.15
=========== =========== =========== ===========
Earnings per share - Diluted....... $ 0.46 $ 0.37 $ 1.28 $ 1.03
=========== =========== =========== ===========
Weighted average number of
common shares outstanding--Basic. 45,229,174 41,969,757 44,306,070 41,221,421
=========== =========== =========== ===========
Weighted average number of common
shares outstanding--Diluted...... 46,299,925 46,285,458 46,304,444 46,000,142
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements
STERICYCLE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
For the Nine
Months Ended September 30,
----------------------
2004 2003
---------- ----------
OPERATING ACTIVITIES:
Net income...................................................... $ 59,119 $ 47,374
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock compensation expense.................................. 21 76
Write-off deferred financing fees........................... -- 484
Deferred tax expense........................................ 11,660 6,634
Tax benefit of disqualifying dispositions of stock
obtained via exercise of options.......................... 6,159 5,645
Loss on sale/write-off of fixed assets...................... 1,470 212
Depreciation................................................ 14,445 11,467
Amortization................................................ 1,799 1,075
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable......................................... (7,312) 2,699
Parts and supplies.......................................... (141) 334
Prepaid expenses and other assets........................... 3,109 7,539
Accounts payable............................................ (3,904) (5,002)
Accrued liabilities......................................... (2,639) 9,224
Deferred revenue............................................ (851) 522
---------- ----------
Net cash provided by operating activities....................... 82,935 88,283
---------- ----------
INVESTING ACTIVITIES:
Payments for acquisitions and international
investments, net of cash acquired........................... (68,227) (33,411)
Short-term investments........................................ (1,017) (790)
Proceeds from sale of equipment............................... 61 384
Capital expenditures.......................................... (23,343) (14,561)
---------- ----------
Net cash used in investing activities........................... (92,526) (48,378)
---------- ----------
FINANCING ACTIVITIES:
Net proceeds from issuance of note payable.................... 12,097 1,132
Net borrowings/(repayments) of senior credit facility......... 32,000 (27,792)
Repurchase of senior subordinated debt........................ -- (17,775)
Repayment of long-term debt................................... (30,822) (3,714)
Payments of deferred financing costs.......................... -- (395)
Purchase of common stock...................................... (10,188) --
Principal payments on capital lease obligations............... (734) (913)
Proceeds from issuances of common stock....................... 10,217 8,024
---------- ----------
Net cash provide by (used in) financing activities.............. 12,570 (41,433)
Effect of exchange rate changes on cash......................... (1,264) (305)
---------- ----------
Net increase (decrease) in cash and cash equivalents............ 1,715 (1,833)
Cash and cash equivalents at beginning of period................ 7,240 8,375
---------- ----------
Cash and cash equivalents at end of period...................... $ 8,955 $ 6,542
========== ==========
Non-cash activities:
Net issuances of common stock for certain acquisitions $ 420 $ 70
Net issuances of notes payable for certain acquisitions $ 17,249 $ --
The accompanying notes are an integral part of these financial statements
STERICYCLE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
Unless the context requires otherwise, "we", "us" or "our" refers to
Stericycle, Inc. and its subsidiaries on a consolidated basis.
NOTE 1--BASIS OF PRESENTATION
The accompanying condensed consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in annual consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations; but the Company believes the
disclosures in the accompanying condensed consolidated financial statements are
adequate to make the information presented not misleading. In our opinion, all
adjustments necessary for a fair presentation for the periods presented have
been reflected and are of a normal recurring nature. These condensed
consolidated financial statements should be read in conjunction with the
Consolidated Financial Statements and notes thereto for the year ended December
31, 2003, as filed with our Annual Report on Form 10-K for the year ended
December 31, 2003. The results of operations for the three and nine-month
periods ended September 30, 2004 are not necessarily indicative of the results
that may be achieved for the entire year ending December 31, 2004.
NOTE 2-ACQUISITIONS
During the quarter ended September 30, 2004, we completed the acquisition
of selected assets of Texas Environmental Services, Inc. which operated in
Texas. In addition, our Mexican subsidiary, Medam S.A. de C.V., acquired all of
the common stock of Sterimed S.A. de C.V., and all the remaining stock of
Proterm de Mexico JV. S.A. de C.V. The combined purchase price of the three
acquisitions was $11.6 million, of which $9.1 million was paid in cash, $2.1
million was paid by the delivery of promissory notes and $0.4 million paid by
the issuance of shares of our common stock. The acquisitions were not
significant to our operations.
During the quarter ended June 30, 2004, our international subsidiary,
Stericycle International LLC, through a wholly owned United Kingdom subsidiary,
completed the acquisition of all the common stock of White Rose Environmental
Limited, which operates in the United Kingdom. The purchase price of $63.8
million was paid with $52.3 million in cash and the delivery of a $11.5 million
interest-free promissory note. The promissory note was recorded on our balance
sheet at $10.2 million after calculating an imputed interest rate. The
acquisition was not significant to our operations.
During the quarter ended March 31, 2004, we completed the
acquisition of selected assets from American Waste Industries, Inc., which
operated in Virginia, Maryland and North Carolina. The purchase price was $12.6
million, of which $7.6 million was paid in cash and $5.0 million was paid by the
delivery of a promissory note. The acquisition was not significant to our
operations.
NOTE 3--STOCK OPTIONS
Pro forma information regarding net income and net income per share is required by FAS 123 as if we had accounted for our employee stock options granted subsequent to December 31, 1994 under the fair value method of that statement. Options granted were valued using the Black-Scholes option-pricing model.
Option value models require the input of highly subjective assumptions. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing method does not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option-vesting period. Our pro forma information follows (in thousands, except for per share information):
Three Months Ended Nine Months Ended September, 30 September, 30 2004 2003 2004 2003 --------------------- --------------------- Stock options expense included in net income.................... $ -- $ -- $ 13 $ 46 --------- -------- --------- ---------- As reported net income............. $ 21,128 $ 17,171 $ 59,119 $ 47,374 Pro forma impact of stock options, net of tax....................... 1,637 1,519 5,129 5,155 --------- -------- --------- ---------- Pro forma net income............... $ 19,491 $ 15,652 $ 53,990 $ 42,219 Earnings per share ========= ======== ========= ========== Basic-as reported............. $ 0.47 $ 0.41 $ 1.33 $ 1.15 ========= ======== ========= ========== Basic-pro forma............... $ 0.43 $ 0.37 $ 1.22 $ 1.02 ========= ======== ========= ========== Diluted-as reported........... $ 0.46 $ 0.37 $ 1.28 $ 1.03 ========= ======== ========= ========== Diluted-pro forma............. $ 0.42 $ 0.34 $ 1.18 $ 0.93 ========= ======== ========= ==========NOTE 4--COMMON AND PREFERRED STOCK.
During the quarter ended September 30, 2004, options to purchase 124,510 shares of common stock were exercised at prices ranging from $6.28-$46.80 per share. During the quarter, we repurchased on the open market and subsequently cancelled 100,000 shares of common stock. The weighted average repurchase price was $45.28 per share.
During the quarter ended June 30, 2004, options to purchase 262,238 shares of common stock were exercised at prices ranging from $3.45- $46.80 per share. During the quarter, we repurchased on the open market and subsequently cancelled 30,000 shares of common stock. The weighted average repurchase price was $45.48 per share.
During the quarter ended March 31, 2004, options to purchase 277,835 shares of common stock were exercised at prices ranging from $4.00- $35.79 per share. During the quarter, we repurchased on the open market and subsequently cancelled 100,000 shares of common stock. The weighted average repurchase price was $42.93 per share.
At the December 31, 2003, there were 22,799 shares of our Series A convertible preferred stock outstanding, which were convertible into 2,835,930 shares of common stock. During the quarter ended March 31, 2004, the holders of the preferred stock converted 10,451 shares into 1,300,000 shares of our common stock. During the quarter ended June 30, 2004, the holders converted their remaining 12,348 shares of preferred stock into 1,535,930 shares of our common stock. As of June 30, 2004, no shares of our Series A convertible preferred stock remained outstanding.
NOTE 5--NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income per share:
STERICYCLE, INC. AND SUBSIDIARIES
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2004 2003 2004 2003
----------- ----------- ------------ -----------
Numerator:
Numerator for basic earnings
per share.............................. $ 21,128 $ 17,171 $ 59,119 $ 47,374
----------- ----------- ----------- -----------
Denominator:
Denominator for basic earnings per share
Weighted average shares.................. 45,229,174 41,969,757 44,306,070 41,221,421
----------- ----------- ----------- -----------
Effective of dilutive securities:
Employee stock options................... 1,062,070 1,471,440 1,989,726 1,934,766
Warrants................................. 8,681 8,591 8,648 8,287
Convertible preferred stock.............. 0 2,835,668 0 2,835,668
----------- ----------- ----------- -----------
Dilutive potential shares.................. 1,070,751 4,315,699 1,998,374 4,778,721
----------- ----------- ----------- -----------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
conversions................................ 46,299,925 46,285,456 46,304,444 46,000,142
=========== =========== =========== ===========
Earnings per share - Basic................... $ 0.47 $ 0.41 $ 1.33 $ 1.15
=========== =========== =========== ===========
Earnings per share - Diluted................. $ 0.46 $ 0.37 $ 1.28 $ 1.03
=========== =========== =========== ===========
The components of total comprehensive income are net income, change in cumulative currency translation adjustments and the change in cumulative unrealized losses on derivative instruments recorded in accordance with FAS 133. The following table details the total comprehensive income for the current and prior year periods (in thousands).
Changes in Balance Sheet
------------------------- Total
Net Currency Derivative Comprehensive
Income Translation Instruments Income
------------------------------------------------
Three months ended September 30, 2003 $ 17,171 $ 655 $ -- $ 17,826
Three months ended September 30, 2004 21,128 (481) -- 20,647
Nine months ended September 30, 2003 47,374 571 232 48,177
Nine months ended September 30, 2004 59,119 (1,064) -- 58,055
We have two geographical reporting segments, United States and Foreign Countries, both of which have goodwill. The changes in the carrying amount of goodwill for the nine months ended September 30, 2004, was as follows (in thousands):
United Foreign
States Countries Total
---------- --------- ----------
Balance as of January 1, 2004 $ 458,593 $ 6,353 $ 464,946
Change due to currency fluctuation -- 429 429
Allocated to intangibles during year (1,700) (2,827) (4,527)
Goodwill acquired during year 18,196 47,959 66,155
---------- --------- ----------
Balance as of September 30, 2004 $ 475,089 $ 51,914 $ 527,003
========== ========= ==========
According to FAS 142, other intangible assets will continue to be amortized over their useful lives. During the quarter ended March 31, 2004, we recorded at fair value the intangibles acquired in connection with our acquisition of Pharmacy Software Solutions, Inc., in December 2003, which previously had been included in goodwill. During the quarter ended September 30, 2004, we recorded at fair value the intangibles acquired in connection with our acquisition of American Waste Industries, Inc., Texas Environmental Services, Inc., and Sterimed S.A. de C.V., which had previously been included in goodwill. At September 30, 2004, we had $39.3 million in the goodwill account related to the White Rose Environmental Limited acquisition and $0.4 million related to the acquisition of Proterm de Mexico. The purchase price allocations for both of these acquisitions are preliminary pending completion of certain intangible asset valuations.
During the quarter ended June 30, 2004 we performed our annual goodwill impairment evaluation and determined that none of our recorded goodwill was impaired. During this evaluation we compared our gross market value to our book value. Our gross market value was calculated by multiplying our shares outstanding on June 30, 2004 by the average closing share price for the previous year. Our book value was determined by subtracting our current liabilities from our total assets. We complete our annual impairment analysis of our indefinite lived intangibles (facility permits) during the quarter ended December 31 of each year.
NOTE 8--NON-CONSOLIDATING JOINT VENTURES
During the quarter ended March 31, 2004 we sold our minority interest investment in Evertrade Medical Waste (Pty) Ltd, a South African joint venture and the associated current receivables and loans due from the joint venture. The balance of the notes receivable issued related to the sale is included in current and long term notes receivable balances on the balance sheet. No gain or loss was recognized on the disposition of these assets.
NOTE 9--NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, and Interpretation of Accounting Research Bulletin (ARB) No. 51" (the "Interpretation"). The Interpretation introduced a new consolidation model, which determines control, and consolidation based on potential variability in gains and losses of the entity being evaluated for consolidation. The adoption of the Interpretation did not have an impact on our consolidated financial statements.
NOTE 10--GUARANTEES
During the quarter ended March 31, 2004, we agreed to provide a guarantee in the amount of $10.0 million to a Japanese bank on behalf of one of our Japanese customers. This guarantee is for a period of five years and the amount will be reduced as the customer repays its loan to the bank.
NOTE 11-LEGAL PROCEEDINGS
We operate in a highly regulated industry and must deal with regulatory inquiries or investigations from time to time that may be initiated for a variety of reasons.
During the quarter ended September 30, 2004, there were no material developments in any of the litigation that we previously reported and that we describe again in this note.
In January 2003, we were sued in federal court in Arizona by a private plaintiff claiming anticompetitive conduct in Arizona, Colorado and Utah from November 1997 to the present and seeking certification of the lawsuit as a class action on behalf of all customers of ours and of Browning Ferris Industries, Inc. in the three-state area during the period in question. Over the next three months, four similar suits were filed in federal court in Utah, Arizona, Colorado and New Mexico. In February and May 2003, two additional suits were filed, in federal court in Utah and Arizona, claiming substantially the same anticompetitive conduct but not seeking class action certification. In December 2003, an eighth suit was filed in federal court in Utah claiming monopolistic and other anticompetitive conduct in California during the prior four years and seeking certification of the suit as a class action on behalf of all California customers of ours during this four-year period. These eight suits were subsequently consolidated before the same judge in federal court in Utah. The first five suits were consolidated under one consolidated class action complaint; the next two suits were consolidated for discovery purposes; and the eighth suit was coordinated for discovery purposes. In June 2004 we settled, for an immaterial amount, the suit filed in May 2003, which, as noted, did not seek class action certification. We believe that this suit was without merit and that none of the remaining seven suits has any merit.
We and four of our current or former officers and directors are parties to a suit filed in state court in Louisiana in July 2002 by a shareholder of our majority-owned subsidiary, 3CI Complete Compliance Corporation ("3CI"). This suit, which was filed on behalf of the minority shareholders of 3CI and derivatively on behalf of 3CI itself, alleges, among other claims, that we, and the four directors of 3CI who were serving as our designees (and who were also officers or directors of ours) unjustly enriched Stericycle at the expense of 3CI and its other shareholders. The plaintiff seeks, among other relief, damages and an order requiring the buyout of 3CI's minority shareholders. In October 2003, the plaintiffs filed an amended complaint adding 3CI as a derivative defendant. This suit is still in the discovery stage. We believe that the plaintiff's claims are without merit.
In May 2003, 3CI, at the direction of its independent directors, filed a declaratory judgment action in state court in Texas to resolve a disagreement with us over the proper rate of conversion of the shares of 3CI's preferred stock held by our wholly-owned subsidiary, Waste Systems, Inc. ("WSI"). In August 2003, this action was dismissed by the court on procedural grounds and 3CI refiled its action as a new suit.
In October 2003, the plaintiff in the Louisiana lawsuit and others answered or intervened in 3CI's Texas lawsuit, naming us as a third-party defendant and making substantially the same claims made in the Louisiana lawsuit. WSI and we have denied these claims, and believe that they are without merit.
In September 2003, the full board of 3CI appointed a special committee consisting of 3CI's three independent directors to act on 3CI's behalf in respect of the dispute with us and WSI regarding the conversion rate of 3CI's preferred stock. In January 2004, the full board expanded the special committee's authority to include an investigation of all claims by the plaintiff in the Louisiana lawsuit and by the third-party plaintiffs in the Texas lawsuit, and to act on 3CI's behalf in respect of both lawsuits. The committee is currently conducting its investigation. We expect that the committee will complete its investigation during the fourth quarter of 2004.
NOTE 12--SUBSEQUENT EVENTS
In October 2004 we exercised our option to redeem all of our outstanding 12-3/8% senior subordinated notes in the aggregate principal amount of $50.9 million. The redemption is anticipated to occur on November 15, 2004. By the terms of the governing trust indenture, the redemption price will be 106.1875% of the principal amount of the notes redeemed plus accrued interest. We will thus incur a cash redemption premium expense of approximately $3.2 million in connection with the redemption, in addition to the payment of the accrued interest of $3.2 million. We will also incur approximately $1.1 million on non-cash accelerated amortization of financing fees associated with our senior subordinated notes. We anticipate drawing on our revolving credit facility to fund the repurchase.
Payments under our senior subordinated notes (the Notes) are unconditionally guaranteed, jointly and severally, by certain of our 100% owned domestic subsidiaries (collectively, "the Guarantors"). Financial information concerning the Guarantors as of September 30, 2004 and December 31, 2003 and for the three and nine-month periods ended September 30, 2004 and 2003 is presented below for purposes of complying with the reporting requirements of the Guarantor subsidiaries. The financial information concerning the Guarantors is being presented through condensed consolidating financial statements since we have more than minimal independent operations and the guarantees are full and unconditional and are joint and several. Financial statements for the Guarantors have not been presented because management does not believe that such financial statements are material to investors.
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2004
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
ASSETS
Current assets:
Cash and cash equivalents.............. $ 863 $ -- $ 863 $ 8,092 $ -- $ 8,955
Other current assets................... 90,503 22,539 113,042 25,245 (27,558) 110,729
---------- ----------- ------------ ----------- ----------- ------------
Total current assets...................... 91,366 22,539 113,905 33,337 (27,558) 119,684
Property, plant and equipment,
net.................................... 95,301 7 95,308 33,569 -- 128,877
Goodwill, net............................. 468,925 1,573 470,498 56,505 -- 527,003
Investment in subsidiaries................ 102,302 3,434 105,736 -- (105,736) --
Other assets.............................. 42,622 2,310 44,932 7,347 -- 52,279
---------- ----------- ------------ ----------- ----------- ------------
Total assets.............................. $ 800,516 $ 29,863 $ 830,379 $ 130,758 $ (133,294) $ 827,843
========== =========== ============ =========== =========== ============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current portion of
long-term debt....................... $ 7,259 $ -- $ 7,259 $ 709 $ -- $ 7,968
Other current liabilities.............. 75,264 185 75,449 28,269 (27,558) 76,160
---------- ----------- ------------ ----------- ----------- ------------
Total current liabilities................. 82,523 185 82,708 28,978 (27,558) 84,128
Long-term debt, net of current
portion................................ 167,181 -- 167,181 22,487 -- 189,668
Other liabilities......................... 57,363 -- 57,363 3,235 -- 60,598
Common shareholders' equity............... 493,449 29,678 523,127 76,058 (105,736) 493,449
---------- ----------- ------------ ----------- ----------- ------------
Total liabilities and
shareholders' equity................... $ 800,516 $ 29,863 $ 830,379 $ 130,758 $ (133,294) $ 827,843
========== =========== ============ =========== =========== ============
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
ASSETS
Current assets:
Cash and cash equivalents.............. $ 5,766 $ -- $ 5,766 $ 1,474 $ -- $ 7,240
Other current assets................... 84,300 19,738 104,038 8,620 (22,161) 90,497
---------- ----------- ------------ ----------- ----------- ------------
Total current assets...................... 90,066 19,738 109,804 10,094 (22,161) 97,737
Property, plant and equipment,
net.................................... 86,769 10 86,779 9,783 -- 96,562
Goodwill, net............................. 447,485 5,226 452,711 12,235 -- 464,946
Investment in subsidiaries................ 45,223 829 46,052 -- (46,052) --
Other assets.............................. 49,009 3,221 52,230 1,731 (5,744) 48,217
---------- ----------- ------------ ----------- ----------- ------------
Total assets.............................. $ 718,552 $ 29,024 $ 747,576 $ 33,843 $ (73,957) $ 707,462
========== =========== ============ =========== =========== ============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current portion of
long-term debt....................... $ 4,819 $ -- $ 4,819 $ 11 $ -- $ 4,830
Other current liabilities.............. 79,079 -- 79,079 7,246 (22,161) 64,164
---------- ----------- ------------ ----------- ----------- ------------
Total current liabilities................. 83,898 -- 83,898 7,257 (22,161) 68,994
Long-term debt, net of current
portion................................ 160,794 -- 160,794 7,966 (5,744) 163,016
Other liabilities......................... 45,096 -- 45,096 1,592 -- 46,688
Redeemable preferred stock................ 20,944 -- 20,944 -- -- 20,944
Common shareholders' equity............... 407,820 29,024 436,844 17,028 (46,052) 407,820
---------- ----------- ------------ ----------- ----------- ------------
Total liabilities and
shareholders' equity................... $ 718,552 $ 29,024 $ 747,576 $ 33,843 $ (73,957) $ 707,462
========== =========== ============ =========== =========== ============
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2004
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
Revenues.................................. $ 111,833 $ 680 $ 112,513 $ 24,039 $ (563) $ 135,989
Cost of revenues.......................... 59,911 331 60,242 17,143 (563) 76,822
Selling, general, and
administrative expenses................ 16,496 122 16,618 3,943 -- 20,561
Acquisition related costs................. 392 -- 392 -- -- 392
---------- ----------- ------------ ----------- ----------- ------------
Total costs and expenses.................. 76,799 453 77,252 21,086 (563) 97,775
---------- ----------- ------------ ----------- ----------- ------------
Income from operations.................... 35,034 227 35,261 2,953 -- 38,214
Equity in net income of
subsidiaries........................... 1,667 (115) 1,552 -- (1,552) --
Other (expense) income, net............... (2,852) 31 (2,821) (552) -- (3,373)
---------- ----------- ------------ ----------- ----------- ------------
Income before income taxes................ 33,849 143 33,992 2,401 (1,552) 34,841
Income tax expense (benefit).............. 12,721 89 12,810 903 -- 13,713
---------- ----------- ------------ ----------- ----------- ------------
Net income (loss)......................... $ 21,128 $ 54 $ 21,182 $ 1,498 $ (1,552) $ 21,128
========== =========== ============ =========== =========== ============
CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2003
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
Revenues.................................. $ 99,378 $ 5,780 $ 105,158 $ 8,861 $ (791) $ 113,228
Cost of revenues.......................... 54,354 4,324 58,678 5,799 (749) 63,728
Selling, general, and
administrative expenses................ 14,836 904 15,740 1,925 -- 17,665
Acquisition related costs................. 216 -- 216 -- -- 216
---------- ----------- ------------ ----------- ----------- ------------
Total costs and expenses.................. 69,406 5,228 74,634 7,724 (749) 81,609
---------- ----------- ------------ ----------- ----------- ------------
Income from operations.................... 29,972 552 30,524 1,137 (42) 31,619
Equity in net income of
subsidiaries........................... 1,779 315 2,094 -- (2,094) --
Other (expense) income, net............... (3,087) 16 (3,071) (209) 42 (3,238)
---------- ----------- ------------ ----------- ----------- ------------
Income before income taxes................ 28,664 883 29,547 928 (2,094) 28,381
Income tax expense (benefit).............. 11,493 214 11,707 (497) -- 11,210
---------- ----------- ------------ ----------- ----------- ------------
Net income (loss)......................... $ 17,171 $ 669 $ 17,840 $ 1,425 $ (2,094) $ 17,171
========== =========== ============ =========== =========== ============
CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2004
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
Revenues.................................. $ 331,846 $ 1,596 $ 333,442 $ 45,639 $ (1,743) $ 377,338
Cost of revenues.......................... 179,058 714 179,772 31,652 (1,743) 209,681
Selling, general, and
administrative expenses................ 49,261 432 49,693 8,712 -- 58,405
Write-down of treatment related fixed asse 1,129 -- 1,129 26 -- 1,155
Acquisition related costs................. 586 -- 586 -- -- 586
---------- ----------- ------------ ----------- ----------- ------------
Total costs and expenses.................. 230,034 1,146 231,180 40,390 (1,743) 269,827
---------- ----------- ------------ ----------- ----------- ------------
Income from operations.................... 101,812 450 102,262 5,249 -- 107,511
Equity in net income of
subsidiaries........................... 3,269 191 3,460 -- (3,460) --
Other (expense) income, net............... (8,602) 53 (8,549) (1,119) -- (9,668)
---------- ----------- ------------ ----------- ----------- ------------
Income before income taxes................ 96,479 694 97,173 4,130 (3,460) 97,843
Income tax expense (benefit).............. 37,360 176 37,536 1,188 -- 38,724
---------- ----------- ------------ ----------- ----------- ------------
Net income................................ $ 59,119 $ 518 $ 59,637 $ 2,942 $ (3,460) $ 59,119
========== =========== ============ =========== =========== ============
CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2003
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
Revenues.................................. $ 298,269 $ 16,807 $ 315,076 $ 26,009 $ (2,411) $ 338,674
Cost of revenues.......................... 166,325 11,878 178,203 17,293 (2,308) 193,188
Selling, general, and
administrative expenses................ 43,344 3,006 46,350 5,473 -- 51,823
Acquisition related costs................. 430 -- 430 -- -- 430
---------- ----------- ------------ ----------- ----------- ------------
Total costs and expenses.................. 210,099 14,884 224,983 22,766 (2,308) 245,441
---------- ----------- ------------ ----------- ----------- ------------
Income from operations.................... 88,170 1,923 90,093 3,243 (103) 93,233
Equity in net income of
subsidiaries........................... 4,079 660 4,739 -- (4,739) --
Other (expense) income, net............... (14,292) 41 (14,251) (616) 103 (14,764)
---------- ----------- ------------ ----------- ----------- ------------
Income before income taxes................ 77,957 2,624 80,581 2,627 (4,739) 78,469
Income tax expense (benefit).............. 30,583 738 31,321 (226) -- 31,095
---------- ----------- ------------ ----------- ----------- ------------
Net income (loss)......................... $ 47,374 $ 1,886 $ 49,260 $ 2,853 $ (4,739) $ 47,374
========== =========== ============ =========== =========== ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by
operating activities................. $ 81,546 $ -- $ 81,546 $ 1,389 $ -- $ 82,935
---------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................... (20,501) -- (20,501) (2,842) -- (23,343)
Proceeds from sale of equipment........ 59 -- 59 2 61
Payments for acquisitions and
international investments, net of
cash acquired........................ (14,857) (10) (14,867) (53,360) -- (68,227)
Short-term investments................ 181 -- 181 (1,198) -- (1,017)
---------- ----------- ------------ ----------- ----------- ------------
Net cash used in investing activities (35,118) (10) (35,128) (57,398) -- (92,526)
---------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of senior credit facilit 32,000 -- 32,000 -- -- 32,000
Principal payments on capital lease
obligations.......................... (713) -- (713) (21) -- (734)
Repayment of long term debt............ (29,535) -- (29,535) (1,287) -- (30,822)
Purchase of treasury stock............. (10,188) -- (10,188) -- -- (10,188)
Net proceeds from issuance
of notes payable..................... -- -- -- 12,097 -- 12,097
Proceeds from issuance of common
stock................................ 10,217 -- 10,217 -- -- 10,217
Intercompany financing of acquisitions (53,112) 10 (53,102) 53,102 -- --
---------- ----------- ------------ ----------- ----------- ------------
Net cash provided by (used in) financing a (51,331) 10 (51,321) 63,891 -- 12,570
---------- ----------- ------------ ----------- ----------- ------------
Effect of exchange rate changes on cash... -- -- -- (1,264) -- (1,264)
---------- ----------- ------------ ----------- ----------- ------------
Net (decrease) increase in cash and
cash equivalents....................... $ (4,903) $ -- $ (4,903) $ 6,618 $ -- 1,715
========== =========== ============ =========== ===========
Cash and cash equivalents at beginning
of period.............................. 7,240
------------
Cash and cash equivalents at end of
period................................. $ 8,955
============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
UNAUDITED
COMBINED
STERICYCLE NON-
STERICYCLE, GUARANTOR AND GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by
operating activities................. $ 85,714 $ (203) $ 85,511 $ 2,772 $ -- $ 88,283
---------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................... (12,802) (254) (13,056) (1,505) -- (14,561)
Proceeds from sale of equipment........ 323 -- 323 61 384
Payments for acquisitions and
international investments, net of
cash acquired........................ (4,982) (27,932) (32,914) (497) -- (33,411)
Short-term investments................ (558) -- (558) (232) -- (790)
---------- ----------- ------------ ----------- ----------- ------------
Net cash used in investing activities (18,019) (28,186) (46,205) (2,173) -- (48,378)
---------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on senior credit facilit (27,792) -- (27,792) -- -- (27,792)
Principal payments on capital lease
obligations.......................... (747) (183) (930) 17 -- (913)
Net proceeds from issuance
of notes payable..................... -- -- -- 1,132 -- 1,132
Repayments on long-term debt........... (2,575) -- (2,575) (1,139) -- (3,714)
Payments of deferred financing costs... (395) -- (395) -- -- (395)
Repurchase of senior subordinated debt. (17,775) -- (17,775) -- -- (17,775)
Proceeds from issuance of common
stock................................ 8,024 -- 8,024 -- -- 8,024
Intercompany financing of acquisitions. (27,932) 27,932 -- -- -- --
---------- ----------- ------------ ----------- ----------- ------------
Net cash provided by (used in) financing a (69,192) 27,749 (41,443) 10 -- (41,433)
---------- ----------- ------------ ----------- ----------- ------------
Effect of exchange rate changes on cash... -- -- -- (305) -- (305)
---------- ----------- ------------ ----------- ----------- ------------
Net (decrease) increase in cash and
cash equivalents....................... $ (1,497) $ (640) $ (2,137) $ 304 $ -- (1,833)
========== =========== ============ =========== ===========
Cash and cash equivalents at beginning
of period.............................. 8,375
------------
Cash and cash equivalents at end of
period................................. $ 6,542
============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We were incorporated in March 1989. We provide compliance services including regulated medical waste collection, transportation and treatment services to our customers and related training and education programs and consulting services. We also sell ancillary supplies and transport pharmaceuticals, photographic chemicals, lead foil and amalgam for recycling in selected geographic service areas. We are also expanding into international markets through acquisitions, joint ventures and/or by licensing our proprietary technology and selling associated equipment.
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2003
The following summarizes (in thousands) the Company's operations:
Three Months Ended September 30,
-----------------------------------------
2004 2003
------------------ -------------------
$ % $ %
-------- -------- -------- -------
Revenues............................................. $135,989 100.0 $ 113,228 100.0
Cost of revenues..................................... 71,806 52.8 60,369 53.3
Depreciation......................................... 5,016 3.7 3,359 3.0
Write-down of treatment related fixed assets........... 0 0.0 0 0.0
-------- -------- -------- -------
Total cost of revenues............................... 76,822 56.5 63,728 56.3
Gross profit......................................... 59,167 43.5 49,500 43.7
Selling, general and
administrative expenses............................ 19,253 14.2 16,781 14.8
Depreciation......................................... 703 0.5 495 0.4
Amortization......................................... 605 0.4 389 0.3
Acquisition related costs............................ 392 0.3 216 0.2
-------- -------- -------- -------
Total selling, general and administrative expenses... 20,953 15.4 17,881 15.8
Income from operations............................... 38,214 28.1 31,619 27.9
Net income........................................... 21,128 15.5 17,171 15.2
Earnings per share-diluted........................... $ 0.46 $ 0.37
Revenues. Revenues increased $22.8 million, or 20.1%, to $136.0 million during the quarter ended September 30, 2004 from $113.2 million during the comparable quarter in 2003 as a result of acquisitions completed during 2004 and our continued strategy of focusing on sales to higher- margin small quantity customers. International equipment related revenues were $2.1 million during the quarter as compared to $0.2 million during the comparable quarter in 2003. This increase is a result of the delivery of a large portion of an order of ETD equipment to a customer in Japan during 2004. During the quarter ended September 30, 2004, acquisitions less than one year old contributed approximately $17.0 million to the increase in our revenues from 2003. For the quarter, our base internal revenue growth for small quantity customers increased approximately 9% while revenues from large quantity customers decreased by approximately 4% because of our program of improving lower-margin accounts. This margin improvement program identifies large quantity customers with margins below internally acceptable thresholds and we make adjustments to pricing or service in an effort to improve the margin. These adjustments may result in our not renewing the customer contract and therefore may result in a reduction of revenues.
We believe the size of the regulated medical waste market in the United States remained relatively stable during the quarter.
Cost of revenues. Cost of revenues increased by $13.1 million to $76.8 million during the quarter ended September 30, 2004 from $63.7 million during the comparable quarter in 2003. This increase in primarily related to our increased revenues. Our gross margin percentage decreased to 43.5% during the quarter from 43.7% during the same quarter in 2003 as the increased revenues from the international acquisitions, which have lower gross margins, reduced gross margins by approximately 230 basis points. This was partially offset by an increase in gross margins on our domestic business by approximately 190 basis points as we continued to realize improvements from our ongoing programs to improve the margins on our large quantity business and increased our number of small quantity customers electing our Steri- SafeSM program from 65,000 to 84,000. This improvement in gross margin was partially offset by an increase in energy costs in 2004 versus the prior year.
Selling, general and administrative expenses. Selling, general and administrative expenses, including acquisition related costs, increased to $21.0 million for the quarter ended September 30, 2004 from $17.9 million for the comparable quarter in 2003. The increase was the result of higher spending related to our acquisitions and strategic marketing programs such as BioSystems, Steri-SafeSM and our other new initiatives, partially offset by lower bad debt expense. Amortization expense increased to $0.6 million during the quarter from $0.4 million in the same quarter in 2003. This increase was the result of intangibles identified relative to acquisitions completed throughout 2003. Selling, general and administrative expenses as a percent of revenues decreased to 15.4% during the quarter from 15.8% during the comparable quarter in 2003.
Income from operations. Income from operations increased to $38.2 million for the quarter ended September 30, 2004 from $31.6 million for the comparable quarter in 2003. The increase was due to higher gross profit, partially offset by the higher selling, general and administrative expenses during the quarter. Income from operations as a percentage of revenue increased to 28.1% during the quarter from 27.9% during the same quarter in 2003 as a result of the factors described above.
Net interest expense. Net interest expense increased to $3.1 million during the quarter ended September 30, 2004 from $2.6 million during the comparable quarter in 2003 due to higher debt outstanding and modestly higher interest rates.
Income tax expense. Income tax expense increased to $13.7 million for the quarter ended September 30, 2004 from $11.2 million for the comparable quarter in 2003. The increase was due to higher taxable income partially offset by a lower effective tax rate. The effective tax rates for the quarters ended September 30, 2004 and 2003 were 39.4% and 39.5%, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2003
The following summarizes (in thousands) the Company's operations:
Nine Months Ended September, 30
-----------------------------------------
2004 2003
------------------ -------------------
$ % $ %
-------- -------- -------- -------
Revenues............................................. $377,338 100.0 $ 338,674 100.0
Cost of revenues..................................... 197,037 52.2 183,210 54.1
Depreciation......................................... 12,644 3.4 9,978 2.9
Write-down of treatment related fixed assets......... 1,155 0.3 0 0.0
-------- -------- -------- -------
Total cost of revenues............................... 210,836 55.9 193,188 57.0
Gross profit......................................... 166,502 44.1 145,486 43.0
Selling, general and
administrative expenses............................ 54,805 14.5 49,259 14.5
Depreciation......................................... 1,801 0.5 1,489 0.4
Amortization......................................... 1,799 0.5 1,075 0.3
Acquisition related costs............................ 586 0.2 430 0.1
-------- -------- -------- -------
Total selling, general and administrative expenses... 58,991 15.6 52,253 15.4
Income from operations............................... 107,511 28.5 93,233 27.5
Net income........................................... 59,119 15.7 47,374 14.0
Earnings per share-diluted........................... $ 1.28 $ 1.03
Revenues. Revenues increased $38.7 million, or 11.4%, to $377.3 million during the nine months ended September 30, 2004 from $338.7 million during the comparable period in 2003 as a result of increased revenues from acquisitions and our continued strategy of focusing on sales to higher- margin small quantity customers. International equipment related revenues were $7.9 million during the period as compared to $1.3 million during the comparable period in 2003. This increase is a result of the delivery of a large portion of an order of ETD equipment to a customer in Japan during 2004. During the nine months ended September 30, 2004, acquisitions less than one year old contributed approximately $24.4 million to the increase in our revenues from 2003. For the period, our base internal revenue growth for small quantity customers increased approximately 9% while revenues from large quantity customers decreased by approximately 6% because of our program of improving lower-margin accounts. This margin improvement program identifies large quantity customers with margins below internally acceptable thresholds and we make adjustments to pricing or service in an effort to improve the margin. These adjustments may result in our not renewing the customer contract and therefore may result in a reduction of revenues.
We believe the size of the regulated medical waste market in the United States remained relatively stable during the period.
Cost of revenues. Cost of revenues increased by $17.6 million to $210.8 million during the nine months ended September 30, 2004 from $193.2 million during the comparable period in 2003. This increase is primarily related to our increased revenues and a write-off of $1.2 million in incineration treatment related fixed assets during the period in 2004. Our gross margin percentage increased to 44.1% during the period from 43.0% during the comparable period in 2003 as we continued to realize improvements from our ongoing programs to improve the margins on our large quantity business and increased our number of small quantity customers electing our Steri- SafeSM program from 55,000 to 84,000. In addition we were able to improve our transportation productivity by increasing our route density. This improvement in gross margin was partially offset by a 0.3% reduction in the gross margin as a result of the above mentioned fixed asset write-off and by an increase in energy costs in 2004.
Selling, general and administrative expenses. Selling, general and administrative expenses, including acquisition related costs, increased to $59.0 million for the nine months ended September 30, 2004 from $52.3 million for the comparable period in 2003. The increase was the result of higher spending related to acquisitions and strategic marketing programs such as BioSystems, Steri-SafeSM and our other new initiatives, partially offset by lower bad debt expense. Amortization expense increased to $1.8 million during the period from $1.1 million in the same period in 2003. This increase was the result of intangibles identified relative to acquisitions completed throughout 2003. Selling, general and administrative expenses as a percent of revenues increased to 15.6% during the period from 15.4% during the comparable period in 2003.
Income from operations. Income from operations increased to $107.5 million for the nine months ended September 30, 2004 from $93.2 million for the comparable period in 2003. The increase was due to higher gross profit, partially offset by the above mentioned fixed asset write-off and higher selling, general and administrative expenses during the period. Income from operations as a percentage of revenue increased to 28.5% during the period from 27.5% during the same period in 2003 as a result of the factors described above.
Net interest expense. Net interest expense decreased to $8.1 million during the nine months ended September 30, 2004 from $9.6 million during the comparable period in 2003 primarily due to reduced debt and modestly lower interest rates.
Loan amendment fees/Debt extinguishments. We did not repurchase any of our 12 3/8% senior subordinated notes in the nine months ended September 30, 2004. During the same period in 2003 we incurred a $3.3 million expense related to the repurchase of $17.8 million of these notes. During the nine months ended September 30, 2004, and in connection with the acquisition of White Rose Environmental, we exercised options available to us under our senior secured credit facility and amended the revolving loan facility. We incurred $0.3 million in expense related to these items.
Income tax expense. Income tax expense increased to $38.7 million for the nine months ended September 30, 2004 from $31.1 million for the comparable period in 2003. The increase was due to higher taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Our credit facility requires us to comply with various financial, reporting, and other covenants and restrictions, including a restriction on dividend payments. At September 30, 2004 we were in compliance with all of our financial debt covenants. As of September 30, 2004, we had $114.4 million of borrowings outstanding under our senior secured credit facility, consisting of $52.0 million under our revolving credit facility and $62.4 million under our Term A loan facility. During the quarter ended June 30, 2004 we exercised an option on our senior secured credit facility to increase the capacity of our revolving credit facility by $50.0 million and also amended the agreement to allow us to request another $50.0 million increase to the revolving credit facility capacity, which we then exercised for $32.0 million. This resulted in our revolving credit facility capacity increasing to $187.0 million with the ability to request another $18.0 in capacity if needed. In July 2004 we also amended our senior secured credit agreement to allow us to prepay the Term B loan facility independent of the Term A loan facility. We then prepaid the entire $27.3 million Term B loan facility in July 2004, while drawing on our revolving credit facility.
In October 2004 we exercised our option to redeem all of our outstanding 12-3/8% senior subordinated notes in the aggregate principal amount of $50.9 million. The redemption is anticipated to occur on or after November 15, 2004. By the terms of the governing trust indenture, the redemption price will be 106.1875% of the principal amount of the notes redeemed plus accrued interest. We will thus incur a cash redemption premium expense of approximately $3.2 million in connection with the redemption, in addition to the payment of the accrued interest of $3.2 million. We will also incur approximately $1.1 million of non-cash accelerated amortization of financing fees associated with our senior subordinated notes. We anticipate drawing on our revolving credit facility to fund the repurchase.
Working Capital. At September 30, 2004, our working capital was $35.6 million compared to working capital of $27.3 million at December 31, 2003. The increase in working capital was primarily due to higher accounts receivable and cash balances and partially offset by higher accounts payable and deferred revenue balances. The changes were primarily the result of acquisitions completed in June and July 2004. At September 30, 2004, we had available a $187.0 million revolving line of credit under our senior secured credit facility which was secured by our accounts receivable and all of our other assets. At September 30, 2004 we had borrowed $52.0 million and had committed $29.0 million as letters of credit under the line.
Net Cash Provided or Used. Net cash provided by operating activities was $82.9 million during the nine months ended September 30, 2004 compared to $88.3 million for the comparable period in 2003. This decrease primarily reflects decreased accounts payable and higher income tax payments in 2004 versus 2003 and higher accounts receivable balances partially offset by higher net income and deferred income tax and depreciation and amortization balances. Net cash provided by operating activities during the nine months ended September 30, 2004 included a $6.2 million tax benefit from disqualifying dispositions of stock acquired upon the exercise of incentive stock options, compared to a $5.6 million tax benefit during the comparable quarter in 2003.
Net cash used in investing activities for the nine months ended September 30, 2004 was $92.5 million compared to $48.4 million for the comparable period in 2003. This increase is primarily attributable to the White Rose Environmental Limited acquisition, which occurred in June 2004. Cash investments in acquisitions and international joint ventures for the nine months ended September 30, 2004 were $68.2 million versus $33.4 million in the comparable period in 2003. Capital expenditures were $23.3 million for the period compared to $14.6 million during the same period in 2003 primarily attributable to the investments being made to rollout the BioSystems program nationwide.
At September 30, 2004 we had approximately 10% of our treatment capacity in North America in incineration and approximately 90% in non-incineration technologies such as our proprietary patented ETD technology and autoclaving. We intend to reduce the incineration portion, as customers' preferences, regulations and business circumstances permit. The implementation of our commitment to move away from incineration may result in a write-down of the incineration equipment as and when we close incinerators that we are currently operating. Our commitment to move away from incineration is in the nature of a goal to be accomplished over an indeterminate number of years. Because of uncertainties relating, among other things, to customer education and acceptance and legal requirements to incinerate portions of the medical waste, we do not have a timetable for this transition. However, during the second quarter of 2004 we began the process of converting our Baltimore, MD incinerator to an autoclave and closed our Terrell, TX incinerator. We incurred a $1.2 million write-off of related equipment when it became idle during the quarter ended June 30, 2004.
Net cash provided by financing activities was $12.6 million during the nine months ended September 30, 2004 compared to net cash used in financing activities of $41.4 million for the comparable period in 2003. This is primarily the result of additional borrowings to fund the White Rose Environmental Limited acquisition in June 2004.
In addition during the nine-month period ended September 30, 2004 we issued a $5.0 million promissory note in connection with the American Waste Industries, Inc. acquisition, a $10.2 million promissory note in connection with the White Rose Environmental Limited acquisition and a $2.1 million promissory note in connection with the Texas Environmental Services Inc. acquisition.
We are subject to market risks arising from changes in interest rates on our senior secured credit facility. Our interest rate exposure results from changes in LIBOR or the base rate, which are used to determine the applicable interest rates under our term loans and revolving credit facility. Our potential loss 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 $1.1 million. Fluctuations in interest rates will not affect the interest payable on our senior subordinated notes, which is fixed.
We have exposure to currency exchange rate fluctuations between the US dollar (USD) and UK pound sterling (GBP) related to a 15 million GBP intercompany loan with White Rose Environmental. We have attempted to hedge this exposure by purchasing forward contracts for the future sale of GBP that align with the repayment terms of the intercompany loan. The contracts are marked to market at the end of each reporting period and the gain or loss, along with the currency gain or loss on the underlying loan balance, is recorded in the other income/expense line of the income statement.
We have exposure to commodity pricing for gas and diesel fuel for our trucks. We do not hedge these items to manage the exposure.
ITEM 4-CONTROLS AND PROCEDURES
Our management, with the participation of our President and Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter covered by this Report. On the basis of this evaluation, our President and Chief Executive Officer and our Chief Financial Officer each concluded that our disclosure controls and procedures were effective.
The term "disclosure controls and procedures' is defined in Rule 13a-14(e) of the Securities Exchange Act of 1934 as "controls and other procedures designed to ensure that information required to be disclosed by the issuer in the reports, files or submits under the Act is recorded, processed, summarized and reported, within the time periods specified in the [Securities and Exchange] Commission's rules and forms." Our disclosure controls and procedures are designed to ensure that material information relating to us and our consolidated subsidiaries is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding our required disclosures.
During the quarter ended September 30, 2004, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely materially to affect, our internal controls over financial reporting.
FROM TIME TO TIME WE ISSUE FORWARD-LOOKING STATEMENTS RELATING TO SUCH THINGS AS ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, ACQUISITION ACTIVITIES AND SIMILAR MATTERS.
THESE FORWARD-LOOKING STATEMENTS MAY INVOLVE RISKS AND UNCERTAINTIES, SOME OF WHICH ARE BEYOND OUR CONTROL (FOR EXAMPLE, GENERAL ECONOMIC CONDITIONS). OUR ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THE RESULTS DESCRIBED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE SUCH DIFFERENCES INCLUDE DIFFICULTIES IN COMPLETING THE INTEGRATION OF ACQUIRED BUSINESSES, CHANGES IN GOVERNMENTAL REGULATION OF MEDICAL WASTE COLLECTION AND TREATMENT, AND INCREASES IN TRANSPORTATION AND OTHER OPERATING COSTS, AS WELL AS VARIOUS OTHER FACTORS.
PART II
OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
See Note 11, Legal Proceedings, in the Notes to the Condensed Consolidated Financial Statements. (Item 1 of Part 1).
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about our purchases during the nine months ended September 30, 2004 of shares of our common stock.
Issuer Purchases of Equity Securities
Maximum Number (or Approximate Dollar Value) of Total Shares (or Number of Shares Units) that Average (or Units) May Yet Be Total Price Purchased as Part Purchased Number of Share Paid per of Publicly Under the (or Units) Share Announced Plans Plans or Period Purchased (or Unit) or Programs Programs =========================================================================================== January 1-January 31, 2004 100,000 42.93 100,000 2,557,170 February 1-February 29, 2004 -- -- -- 2,557,170 March 1-March 31, 2004 -- -- -- 2,557,170 April 1-April 30, 2004 -- -- -- 2,557,170 May 1-May 31, 2004 -- -- -- 2,557,170 June 1-June 30, 2004 30,000 45.48 30,000 2,527,170 July 1-July 31, 2004 -- -- -- 2,527,170 August 1-August 31, 2004 -- -- -- 2,527,170 September 1-September 30, 2004 100,000 45.28 100,000 2,427,170The shares were repurchased as part of the plan announced on May 16, 2002, authorizing the repurchase of up to 3,000,000 shares of our common stock. The plan does not have an expiration date.
ITEM 6.EXHIBITS
3.1 Amendment of amended and restated bylaws, effective August 10, 2004
10.1 Amendment No. 6 to Amended and Restated Credit Agreement, dated as of August 23, 2004, among us as the borrower, certain subsidiaries of ours as guarantors, various financial institutions and other persons from time to time parties as the lenders, and Bank of America, N.A., as the administrative agent
10.2 Form of stock option agreement used for the grant of a nonstatutory stock option under our 1997 Stock Option Plan
10.3 Form of stock option agreement used for the grant of an incentive stock option under our 1997 Stock Option Plan
10.4 Form of stock option agreement used for the grant of a nonstatutory stock option under our 2000 Nonstatutory Stock Option Plan
10.5 Form of stock option agreement used for the grant of a nonstatutory stock option under our Directors Stock Option Plan
31.1 Rule 13a-14(a)/15d-14(a) Certification of Mark C. Miller, President and Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Frank J.M. ten Brink, Executive Vice President and Chief Financial Officer
32 Section 1350 Certification of Mark C. Miller, President and Chief Executive Officer, and Frank J.M. ten Brink, Executive Vice President and Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 5, 2004.
| STERICYCLE, INC. | |
| (Registrant) | |
| By: | /s/ Frank J.M. ten Brink |
| Frank J.M. ten Brink | |
| Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | |