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, 2005 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 is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES [X] NO [ ],
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2). YES [ ] NO [X],
As of November 7, 2005 there were 44,122,769 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, 2005 (Unaudited) and December 31, 2004 (Audited)
STERICYCLE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
September 30, December 31,
2005 2004
------------ -----------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 3,795 7,850
Short-term investments.......................................... 290 99
Accounts receivable, less allowance for doubtful
accounts of $4,387 in 2005 and $4,188 in 2004................. 89,983 74,888
Parts and supplies.............................................. 4,525 4,259
Prepaid expenses................................................ 9,171 6,716
Notes receivable................................................ 2,698 3,423
Deferred tax asset.............................................. 11,887 13,296
Other........................................................... 12,946 4,961
------------ -----------
Total current assets................................... 135,295 115,492
Property, plant and equipment, net.............................. 126,350 135,512
------------ -----------
Other assets:
Goodwill, net................................................... 611,057 516,808
Intangible assets, less accumulated amortization of
$8,969 in 2005 and $7,951 in 2004............................. 49,629 50,800
Notes receivable................................................ 9,517 9,517
Other........................................................... 2,961 6,012
------------ -----------
Total other assets............................................ 673,164 583,137
------------ -----------
Total assets........................................... $ 934,809 $ 834,141
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt............................... $ 12,033 $ 13,218
Accounts payable................................................ 24,873 17,998
Accrued liabilities............................................. 46,420 44,411
Deferred revenue................................................ 11,584 7,611
------------ -----------
Total current liabilities.............................. 94,910 83,238
------------ -----------
Long-term debt, net of current portion.......................... 235,282 190,431
Deferred income taxes........................................... 67,240 57,477
Other liabilities............................................... 5,382 7,623
Shareholders' equity:
Common stock (par value $.01 per share, 80,000,000
shares authorized, 44,280,914 issued and outstanding in
in 2005, 44,732,070 issued and outstanding in 2004)........... 444 448
Additional paid-in capital...................................... 267,937 298,046
Accumulated other comprehensive income.......................... 1,017 2,461
Retained earnings............................................... 262,597 194,417
------------ -----------
Total shareholders' equity...................................... 531,995 495,372
------------ -----------
Total liabilities and shareholders' equity.................... $ 934,809 $ 834,141
============ ===========
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,
------------------------ ------------------------
2005 2004 2005 2004
----------- ------------ ----------- ------------
Revenues........................... $ 153,176 $ 135,989 $ 442,902 $ 377,338
Costs and expenses:
Cost of revenues................. 81,513 71,806 236,856 197,037
Selling, general and
administrative expenses........ 23,300 19,253 65,965 54,805
Depreciation and amortization.... 5,365 6,324 15,735 16,244
Impairment/write-off of fixed assets... 872 -- 872 1,155
Acquisition related costs........ 174 392 444 586
----------- ----------- ----------- -----------
Total costs and expenses...... 111,224 97,775 319,872 269,827
----------- ----------- ----------- -----------
Income from operations............. 41,952 38,214 123,030 107,511
----------- ----------- ----------- -----------
Other income (expense):
Interest income.................. 228 168 428 286
Interest expense................. (3,251) (3,266) (8,848) (8,379)
Write-off of deferred financing fees
(2005)/Loan amendment fees (2004)... -- -- (197) (333)
Other expense.................... (489) (275) (2,296) (1,242)
----------- ----------- ----------- -----------
Total other income (expense).. (3,512) (3,373) (10,913) (9,668)
----------- ----------- ----------- -----------
Income before income taxes......... 38,440 34,841 112,117 97,843
Income tax expense................. 15,057 13,713 43,937 38,724
----------- ----------- ----------- -----------
Net income......................... $ 23,383 $ 21,128 $ 68,180 $ 59,119
=========== =========== =========== ===========
Earnings per share - Basic......... $ 0.53 $ 0.47 $ 1.54 $ 1.33
=========== =========== =========== ===========
Earnings per share - Diluted....... $ 0.52 $ 0.46 $ 1.50 $ 1.28
=========== =========== =========== ===========
Weighted average number of
common shares outstanding--Basic...44,414,799 45,229,174 44,329,592 44,306,070
=========== =========== =========== ===========
Weighted average number of common
shares outstanding--Diluted...... 45,401,778 46,299,925 45,332,089 46,304,444
=========== =========== =========== ===========
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
--------------------------
2005 2004
---------- --------------
OPERATING ACTIVITIES:
Net income...................................................... $ 68,180 $ 59,119
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock compensation expense.................................. 18 21
Write-off deferred financing fees........................... 197 --
Deferred income taxes....................................... 11,172 11,660
Tax benefit of disqualifying dispositions of stock options
and exercise of non-qualified stock options............... 6,098 6,159
Impairment of property and equipment........................ 872 1,470
Depreciation................................................ 14,564 14,445
Amortization................................................ 1,171 1,799
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable......................................... (12,249) (7,312)
Parts and supplies.......................................... (234) (141)
Prepaid expenses and other assets........................... (7,805) 3,109
Accounts payable............................................ 6,614 (3,904)
Accrued liabilities......................................... (1,272) (2,639)
Deferred revenue............................................ 3,595 (851)
---------- ------------
Net cash provided by operating activities....................... 90,921 82,935
---------- ------------
INVESTING ACTIVITIES:
Payments for acquisitions and international
investments, net of cash acquired........................... (46,888) (68,227)
Short-term investments........................................ (191) (1,017)
Proceeds from sale of equipment............................... 206 61
Capital expenditures.......................................... (20,140) (23,343)
---------- ------------
Net cash used in investing activities........................... (67,013) (92,526)
---------- ------------
FINANCING ACTIVITIES:
Net proceeds from issuance of note payable.................... 735 12,097
Net borrowings of 2001 senior credit facility................. 27,500 32,000
Repayment of 2001 senior credit facility...................... (198,853) --
Borrowings on 2005 senior credit facility..................... 218,853 --
Repayments on 2005 senior credit facility..................... (36,853) --
Payments of deferred financing costs.......................... (97) --
Repayment of long-term debt................................... (4,515) (30,822)
Purchase/cancellation of common stock......................... (47,326) (10,188)
Principal payments on capital lease obligations............... (608) (734)
Proceeds from other issuances of common stock................. 11,097 10,217
---------- ------------
Net cash (used in) provided by financing activities............. (30,067) 12,570
Effect of exchange rate changes on cash......................... 2,104 (1,264)
---------- ------------
Net increase (decrease) in cash and cash equivalents............ (4,055) 1,715
Cash and cash equivalents at beginning of period................ 7,850 7,240
---------- ------------
Cash and cash equivalents at end of period...................... $ 3,795 $ 8,955
========== ============
Non-cash activities:
Net issuances of common stock for certain acquisitions $ -- $ 420
Net issuances of notes payable for certain acquisitions $ 37,205 $ 17,249
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; 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, 2004, as filed with our Annual Report on Form 10-K for the year ended December 31, 2004. The results of operations for the three and nine months ended September 30, 2005 are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2005.
NOTE 2--ACQUISITIONS
During the quarter ended September 30, 2005, we completed two acquisitions of medical waste businesses and our Mexican subsidiary completed three acquisitions of medical waste businesses.
In July, we acquired selected assets of Med-Trac Inc., which operated in Pennsylvania. In September, we acquired all of the stock of Nicklin Associates Inc., which operated in New York, Maryland and Washington D.C. In addition, our Mexican subsidiary, Medam S.A. de C.V., completed three acquisitions of selected assets of L.A.E. Gabriela Hernandez Romo, Impulso Mexicano, S.A. de C.V. and Biol. Donaji de la Caridad Gutierrez Garcia during the quarter ended September 30, 2005.
During the quarter ended June 30, 2005, we completed six acquisitions of medical waste businesses and one acquisition of a pharmaceutical returns (reverse distribution) business, our Mexican subsidiary completed two acquisitions of medical waste businesses, and our United Kingdom subsidiary completed one acquisition of a medical waste business.
In April, we completed four acquisitions of medical waste businesses, consisting of selected assets of Envirotech of America, Inc. which operated in central New York, Medical Systems, Inc., which operated in Missouri, BioClean, Inc., which operated in western New York, and all of the stock of Sanford Motors, Inc. and two affiliated companies, which operated in eastern Pennsylvania and New Jersey. We also acquired all of the stock of Automated Health Technologies, Inc., a pharmaceutical returns company based in Florida. In May, we acquired selected assets of Five Star Waste, Inc., which operated a medical waste business in Florida, and in June, we acquired selected assets of Bio-Med Tec Inc. and an affiliated company, which operated a medical waste business in West Virginia and southern Ohio.
In addition, in April our United Kingdom subsidiary, Stericycle International, Ltd., acquired all of the stock of Healthcare Waste Limited (formerly known as Select Environmental Limited), which operated a medical waste business in southern England, and our Mexican subsidiary, Medam S.A. de C.V., completed the acquisition of the stock of Planta Incineradora de Residuos Biologicos Infecciosos, S.A. de C.V. and Soluciones Ecologicas Integrales, S.A. de C.V.
During the quarter ended March 31, 2005, our Mexican subsidiary, Medam S.A. de C.V. acquired selected assets of Servicios Ecologicos PEGE y Asociados S. De R.L. de C.V.
The aggregate net purchase price of our acquisitions during the nine months ended September 30, 2005 was approximately $84.1 million, of which $46.9 million was paid in cash and $37.2 million was paid by the issuance of promissory notes. These acquisitions were not significant to our operations, either individually or in the aggregate. The purchase price allocations for these acquisitions are preliminary pending completion of certain intangible asset valuations.
NOTE 3--STOCK OPTIONS
During the quarter ended September 30, 2005, options to purchase 18,630 shares of common stock were granted to employees. These options vest over a five-year period in annual increments of 20% of the option shares and have exercise prices of $50.74-$59.39 per share.
During the quarter ended June 30, 2005, options to purchase 40,600 shares of common stock were granted to employees. These options vest over a five-year period in annual increments of 20% of the option shares and have exercise prices of $44.05-$49.68 per share. In addition options to purchase 38,496 shares of common stock were granted to outside directors. These options vest on the first anniversary of their grant and have an exercise price of $48.01 per share.
During the quarter ended March 31, 2005, options to purchase 639,295 shares of common stock were granted to employees. These options vest over a five-year period in annual increments of 20% of the option shares and have exercise prices of $44.25-$46.02 per share. In addition, in February 2005 warrants to purchase 900 shares of common stock were granted to an outside consultant. These warrants become exercisable over a five-year period in annual increments of 20% of the shares and have an exercise price of $45.80 per share.
We have elected to follow Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employee" ("APB 25") and related interpretations in accounting for employee stock options. Under APB 25, because the exercise price of our employee fixed stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. We are required to adopt FAS 123R, which replaces FAS 123 and supercedes APB 25, beginning January 1, 2006.
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 employee 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Stock options expense included
in net income................... $ -- $ -- $ 11 $ 13
----------- ----------- ----------- -----------
As reported net income............ $ 23,383 $ 21,128 $ 68,180 $ 59,119
Pro forma impact of stock options,
net of tax...................... 1,926 1,637 5,639 5,129
----------- ----------- ----------- -----------
Pro forma net income.............. $ 21,457 $ 19,491 $ 62,541 $ 53,990
=========== =========== =========== ===========
Earnings per share
Basic-as reported............ $ 0.53 $ 0.47 $ 1.54 $ 1.33
=========== =========== =========== ===========
Basic-pro forma.............. $ 0.48 $ 0.43 $ 1.41 $ 1.22
=========== =========== =========== ===========
Diluted-as reported.......... $ 0.52 $ 0.46 $ 1.50 $ 1.28
=========== =========== =========== ===========
Diluted-pro forma............ $ 0.48 $ 0.42 $ 1.39 $ 1.18
=========== =========== =========== ===========
NOTE 4--COMMON STOCK.
During the quarter ended September 30, 2005, options to purchase 217,421 shares of common stock were exercised at prices ranging from $6.38-$47.66 per share. During the quarter, we repurchased on the open market and subsequently cancelled 146,600 shares of common stock. The weighted average repurchase price was $55.33 per share.
During the quarter ended June 30, 2005, options to purchase 171,449 shares of common stock were exercised at prices ranging from $6.38- $46.80 per share and warrants to purchase 4,389 shares of common stock were exercised at the price of $8.75 per share. During the quarter, we repurchased on the open market and subsequently cancelled 117,600 shares of common stock. The weighted average repurchase price was $43.92 per share.
During the quarter ended March 31, 2005, options to purchase 158,949 shares of common stock were exercised at prices ranging from $6.28- $46.98 per share and warrants to purchase 4,371 shares of common stock were exercised at the price of $8.75 per share. During the quarter, we repurchased on the open market and subsequently cancelled 748,600 shares of common stock. The weighted average repurchase price was $45.52 per share.
NOTE 5--NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income per share (in thousands, except share and per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2005 2004 2005 2004
----------- ----------- ------------ -----------
Numerator:
Numerator for basic earnings per share
net income............................. $ 23,383 $ 21,128 $ 68,180 $ 59,119
----------- ----------- ----------- -----------
Denominator:
Denominator for basic earnings per share
Weighted average shares.................. 44,414,799 45,229,174 44,329,592 44,306,070
----------- ----------- ----------- -----------
Effective of dilutive securities:
Employee stock options................... 986,812 1,062,070 1,002,425 1,989,726
Warrants................................. 167 8,681 72 8,648
----------- ----------- ----------- -----------
Dilutive potential shares.................. 986,979 1,070,751 1,002,497 1,998,374
----------- ----------- ----------- -----------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
conversions................................ 45,401,778 46,299,925 45,332,089 46,304,444
=========== =========== =========== ===========
Earnings per share - Basic................... $ 0.53 $ 0.47 $ 1.54 $ 1.33
=========== =========== =========== ===========
Earnings per share - Diluted................. $ 0.52 $ 0.46 $ 1.50 $ 1.28
=========== =========== =========== ===========
NOTE 6--SENIOR CREDIT FACILITY
In June 2005, we obtained a new $400.0 million senior unsecured revolving credit facilty maturing in June 2010 in place of our existing senior secured credit facility consisting of a $205.0 million revolving credit facility (under which borrowings of $136.5 million were outstanding) and a $62.4 million Term A loan, both maturing in September 2007. The new credit facility reduced the interest rates that we are charged by reducing the applicable margin that is added to the relevant interest rate. The new credit facility also allows us to borrow in pre-approved currencies other than United States dollars. Our borrowings bear interest at fluctuating interest rates determined, at our election in advance for any quarterly or other applicable interest period, by reference to (i) a "base rate" (the higher of the prime rate at Bank of America, N.A. or 0.5% above the rate on overnight federal funds transactions) or (ii) the London Interbank Offered Rate, or LIBOR, plus, in either case, the applicable margin within the relevant range of margins provided in our credit agreement. The applicable margin is based upon our consolidated leverage ratio. As of September 30, 2005, the margin for interest rates on borrowings under our new credit facility was 0.0% on base rate loans and 0.75% on LIBOR loans.
As of September 30, 2005, we had $182.0 million of borrowings outstanding under our new senior unsecured credit facility. In addition, we had $46.2 million committed to outstanding letters of credit.
NOTE 7--COMPREHENSIVE INCOME
The components of total comprehensive income are net income and the change in cumulative currency translation adjustments.The following table details the total comprehensive income for the current and prior year periods (in thousands).
Changes in
Balance Sheet
-------------- Total
Net Currency Comprehensive
Income Translation Income
-------------------------------------------
Three months ended September 30, 2004... $ 21,128 $ (481) $ 20,647
Three months ended September 30, 2005... 23,383 640 24,023
Nine months ended September 30, 2004.... 59,119 (1,064) 58,055
Nine months ended September 30, 2005.... 68,180 (1,444) 66,736
NOTE 8--GUARANTEE
We have guaranteed a loan to the Azoroa Bank in Japan 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 five- year loan with a current balance of $9.3 million with the Azoroa Bank that expires in June 2009.
NOTE 9--GOODWILL
We have two geographical reporting segments, United States and Foreign Countries, both of which have goodwill. The changes in the carrying amount of goodwill, net of amortization, for the nine months ended September 30, 2005 were as follows (in thousands):
United Foreign
States Countries Total
------------ ------------ ---------
Balance as of January 1, 2005........ $ 475,581 $ 41,227 $ 516,808
Change due to currency fluctuation... -- (734) (734)
Allocated to intangibles............. (255) (1,543) (1,798)
Changes in Goodwill for
2004 acquistions................. (393) 16,957 16,564
Goodwill on 2005 acquisitions........ 74,331 5,886 80,217
------------ ------------ ---------
Balance as of September 30, 2005..... $ 549,264 $ 61,793 $ 611,057
============ ============ =========
During the quarter ended June 30, 2005 we performed our annual goodwill impairment evaluation for both of our reportable units, United States and Foreign Countries, and determined that none of our recorded goodwill was impaired. During this evaluation we calculated the fair value of the reporting units by multiplying their EBITDA for the prior twelve months times a valuation multiple. The valuation multiple was consistent with multiples of EBITDA used to determine the fair value of acquisitions. The fair value was then compared to the reporting units' book value and determined to be in excess of the book value. The book value was determined by subtracting their current liabilities from their 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 10--LEGAL PROCEEDINGS
We operate in a highly regulated industry and must deal with regulatory inquiries or investigations from time to time that may be instituted for a variety of reasons. We are also involved in a variety of civil litigation from time to time.
During the quarter ended September 30, 2005, there were no material developments in any of the litigation that we described in our annual report on Form 10-K for 2004 except in the 3CI (Louisiana) litigation. The 3CI (Louisiana) litigation is now scheduled for trial in December 2005. At a hearing on October 25, 2005, the court granted the plaintiffs' motion to compel discovery and for sanctions and ruled out that we would not be allowed to present evidence at trial on the issue of our liability. The plaintiffs must still establish our liability by proving their case at trial
NOTE 11-NEW ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment". This statement requires that companies recognize compensation expense equal to the fair value of stock options or other share-based awards. We will adopt FAS 123(R) on January 1, 2006 on a modified prospective basis, recognizing compensation expense for (i) new stock options and share-based awards granted on or after January 1, 2006 and (ii) any portion of stock options and share-based awards that have not vested as of that date. We have not determined whether we will use the Black-Scholes option-pricing model or a binomial option-pricing model to calculate the fair value of our stock options. Note 3 of these Condensed Consolidated Financial Statements approximates the effects on net income and earnings per share if we had adopted SFAS No. 123(R) using the Black-Scholes option-pricing model.
NOTE 12--GEOGRAPHIC INFORMATION
Management has determined that we have two reportable segments, United States and Foreign Countries based on our consideration of the criteria detailed in FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. Revenues are attributed to countries based on the location of customers. Intercompany revenues recorded by the United States for work performed in Canada, which are immaterial, are eliminated prior to reporting United States revenues. The same accounting principles and critical accounting policies are used in the preparation of the financial statements for both reporting segments.
Detailed information for our United States reporting segment is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------
(in thousands) (in thousands)
Medical waste management services... $ 126,982 $ 113,105 $ 368,362 $ 333,626
----------- ----------- ----------- -----------
Total Revenues................... 126,982 113,105 368,362 333,626
----------- ----------- ----------- -----------
Net interest expense............. 2,738 2,974 7,394 7,896
Income before income taxes....... 35,591 30,910 105,802 89,510
Income taxes..................... 14,003 13,004 41,564 37,669
----------- ----------- ----------- -----------
Net income....................... $ 21,588 $ 17,906 $ 64,238 $ 51,841
=========== =========== =========== ===========
Depreciation and amortization.... $ 3,908 $ 4,664 $ 11,686 $ 13,355
Detailed information for our Foreign Countries reporting segment is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------
(in thousands) (in thousands)
Medical waste management services... $ 25,687 $ 20,817 $ 73,867 $ 35,800
Proprietary equipment and technology
license sales.................. 507 2,067 673 7,912
----------- ----------- ----------- -----------
Total Revenues................... 26,194 22,884 74,540 43,712
----------- ----------- ----------- -----------
Net interest expense............. 285 124 1,026 197
Income before income taxes....... 2,849 3,931 6,315 8,333
Income taxes..................... 1,054 709 2,373 1,055
----------- ----------- ----------- -----------
Net income....................... $ 1,795 3,222 3,942 7,278
=========== =========== =========== ===========
Depreciation and amortization.... $ 1,457 $ 1,660 $ 4,049 $ 2,889
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. In addition, we have begun to provide pharmaceutical returns services, and 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, 2005 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2004
The following summarizes (in thousands) the Company's operations:
Three Months Ended September 30,
-----------------------------------------
2005 2004
------------------ -------------------
$ % $ %
-------- -------- -------- -------
Revenues............................................. $153,176 100.0 $ 135,989 100.0
Cost of revenues..................................... 81,513 53.2 71,806 52.8
Depreciation......................................... 4,075 2.7 5,016 3.7
-------- -------- -------- -------
Total cost of revenues............................... 85,588 55.9 76,822 56.5
-------- -------- -------- -------
Gross profit......................................... 67,588 44.1 59,167 43.5
Selling, general and
administrative expenses............................ 23,300 15.2 19,253 14.2
Depreciation......................................... 791 0.5 703 0.5
Amortization......................................... 499 0.3 605 0.4
Acquisition related expenses......................... 174 0.1 392 0.3
-------- -------- -------- -------
Total selling, general and administrative expenses... 24,764 16.2 20,953 15.4
Impairment / write-off of fixed assets............... 872 0.6 -- 0.0
-------- -------- -------- -------
Income from operations............................... 41,952 27.4 38,214 28.1
Net income........................................... 23,383 15.3 21,128 15.5
Earnings per share-diluted........................... $ 0.52 $ 0.46
Revenues. Revenues increased $17.2 million, or 12.6%, to $153.2 million during the quarter ended September 30, 2005 from $136.0 million during the comparable quarter in 2004 as a result of acquisitions completed during both 2004 and 2005, and our continued strategy of focusing on sales to higher-margin small quantity customers. International machinery revenues decreased $1.6 million during the quarter ended September 30, 2005 to $0.5 million from $2.1 million during the comparable quarter in 2004 as a result of the delivery of a large portion of an order of ETD equipment to a customer in Japan in 2004. During the quarter ended September 30, 2005, acquisitions less than one year old contributed approximately $7.1 million in revenue for the quarter. For the quarter, our base internal revenue growth for small quantity customers increased approximately 9% and revenues from large quantity customers increased by approximately 6% as we continued to increase our number of Bio Systems customers.
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 $8.8 million to $85.6 million during the quarter ended September 30, 2005 from $76.8 million during the comparable quarter in 2004. This increase is primarily related to our increased revenues during 2005 compared to 2004. Our gross margin percentage increased to 44.1% during the quarter from 43.5% during the same quarter in 2004 due to an increase in gross margins on our domestic business 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 to 93,000.
Selling, general and administrative expenses. Selling, general and administrative expenses, including acquisition related costs, increased to $24.8 million for the quarter ended September 30, 2005 from $21.0 million for the comparable quarter in 2004. 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. Amortization expense decreased to $0.5 million during the quarter from $0.6 million in the same quarter in 2004. This decrease was the result of intangible assets being fully amortized during the fourth quarter of 2004. Acquisition related expenses decreased to $0.2 million in 2005 as compared to $0.4 million in 2004. Selling, general and administrative expenses as a percent of revenues increased to 16.2% during the quarter from 15.4% during the comparable quarter in 2004.
Income from operations. Income from operations increased to $42.0 million for the quarter ended September 30, 2005 from $38.2 million for the comparable quarter in 2004. The increase was due to higher gross profit, partially offset by higher selling, general and administrative expenses during the quarter. In September 2005, 3CI Complete Compliance Corporation, of which we own the majority of the common stock, recorded a non- cash impairment charge of $0.9 million on its Springhill, Louisiana building and property. Income from operations as a percentage of revenue decreased to 27.4% during the quarter from 28.1% during the same quarter in 2004.
Net interest expense. Net interest expense decreased to $3.0 million during the quarter ended September 30, 2005 from $3.1 million during the comparable quarter in 2004 due to higher interest income.
Income tax expense. Income tax expense increased to $15.1 million for the quarter ended September 30, 2005 from $13.7 million for the comparable quarter in 2004. 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, 2005 and 2004 were 39.2% and 39.4%, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2004
The following summarizes (in thousands) the Company's operations:
Nine Months Ended September 30,
-----------------------------------------
2005 2004
------------------ -------------------
$ % $ %
-------- -------- -------- -------
Revenues............................................. $442,902 100.0 $ 377,338 100.0
Cost of revenues..................................... 236,856 53.5 197,037 52.2
Depreciation......................................... 12,246 2.8 12,644 3.4
-------- -------- -------- -------
Total cost of revenues............................... 249,102 56.2 209,681 55.6
-------- -------- -------- -------
Gross profit......................................... 193,800 43.8 167,657 44.4
Selling, general and
administrative expenses............................ 65,965 14.9 54,805 14.5
Depreciation......................................... 2,318 0.5 1,801 0.5
Amortization......................................... 1,171 0.3 1,799 0.5
Acquisition related costs............................ 444 0.1 586 0.2
-------- -------- -------- -------
Total selling, general and administrative expenses... 69,898 15.8 58,991 15.6
Impairment / write-off of fixed assets............... 872 0.2 1,155 0.3
-------- -------- -------- -------
Income from operations............................... 123,030 27.8 107,511 28.5
Net income........................................... 68,180 15.4 59,119 15.7
Earnings per share-diluted........................... $ 1.50 $ 1.28
Revenues. Revenues increased $65.6 million, or 17.4%, to $442.9 million during the nine months ended September 30, 2005 from $377.3 million during the comparable quarter in 2004 as a result of acquisitions completed during both 2004 and 2005, and our continued strategy of focusing on sales to higher-margin small quantity customers. International machinery revenues decreased $7.2 million to $0.7 million during the period as compared to $7.9 million during the comparable period in 2004 as a result of the delivery of a large portion of an order of ETD equipment to a customer in Japan in 2004. During the nine months ended September 30, 2005, acquisitions less than one year old contributed approximately $42.1 million to the increase in our revenues from 2004. For the nine months, our base internal revenue growth for small quantity customers increased approximately 9% and revenues from large quantity customers increased by approximately 5% as we continued to increase our number of Bio Systems customers.
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 $39.4 million to $249.1 million during the nine months ended September 30, 2005 from $209.7 million during the comparable period in 2004. This increase is primarily related to our increased revenues during 2005 compared to 2004. Our gross margin percentage decreased to 43.8% during the period from 44.4% during the same period in 2004 due to increased revenues from the international acquisitions completed during 2004, which have lower gross margins, and lower revenues from machinery sales, which in combination reduced gross margins by approximately 175 basis points. This was partially offset by an increase in gross margins on our domestic business by approximately 68 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 to 93,000.
Selling, general and administrative expenses. Selling, general and administrative expenses, including acquisition related costs, increased to $69.9 million for the nine months ended September 30, 2005 from $59.0 million for the comparable period in 2004. 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. Amortization expense decreased to $1.2 million during the nine months from $1.8 million in the same period in 2004. This decrease was the result of intangible assets being fully amortized during the fourth quarter of 2004. Acquisition related expenses decreased to $0.4 million in 2005 as compared to $0.6 million in 2004. Selling, general and administrative expenses as a percent of revenues increased to 15.8% during the nine months from 15.6% during the comparable period in 2004.
Income from operations. Income from operations increased to $123.0 million for the nine months ended September 30, 2005 from $107.5 million for the comparable period in 2004. The increase was due to higher gross profit, partially offset by the higher selling, general and administrative expenses during the period. During the nine months ended September 30, 2005, 3CI Complete Compliance Corporation, of which we own the majority of the common stock, recorded a non-cash impairment charge of $0.9 million on its Springhill, Louisiana building and property as compared to a $1.2 million write down of idled Stericycle incinerator equipment and related spare parts during the comparable period in 2004. Income from operations as a percentage of revenue decreased to 27.8% during the period from 28.5% during the same period in 2004 as a result of our international operations having lower operating margins than our domestic operations.
Net interest expense. Net interest expense increased to $8.4 million during the nine months ended September 30, 2005 from $8.1 million during the comparable period in 2004 due to higher debt levels and higher interest rates, partially offset by higher interest income.
Income tax expense. Income tax expense increased to $43.9 million for the nine months ended September 30, 2005 from $38.7 million for the comparable period in 2004. The increase was due to higher taxable income partially offset by a lower effective tax rate. The effective tax rates for the nine months ended September 30, 2005 and 2004 were 39.2% and 39.6%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 2005 we obtained a new $400 million senior unsecured revolving credit facility that will mature in June 2010. At September 30, 2005 the margin for interest rates on borrowings under our revolving credit facility was 0.0% on base rate loans and 0.75% on LIBOR loans. The new facility replaced our prevous senior secured facility, which consisted of a $205 million revolving credit facility and a $62.4 million Term A loan. Our credit facility requires us to comply with various financial, reporting, and other covenants and restrictions, including certain limitations on dividend payments. At September 30, 2005 we were in compliance with all of our financial debt covenants. As of September 30, 2005, we had $182.0 million of borrowings outstanding under our senior unsecured credit facility. In addition we had $46.2 million committed to letters of credit.
Working Capital. At September 30, 2005, our working capital was $40.4 million compared to working capital of $32.3 million at December 31, 2004.
Net Cash Provided or Used. Net cash provided by operating activities was $90.9 million during the nine months ended September 30, 2005 compared to $82.9 million for the comparable period in 2004. This increase was primarily due to higher income, deferred revenue and accounts payable balances partially offset by increased accounts receivable and other asset balances. Net cash provided by operating activities in 2005 included a $6.1 million tax benefit from disqualifying dispositions of stock options and exercise of non-qualified stock options as compared to a $6.2 million tax benefit in 2004. When the company adopts FAS 123R this tax benefit will be not be recorded under net cash provided by operating activities but will be reclassified to net cash used in financing activities.
Net cash used in investing activities for the nine months ended September 30, 2005 was $67.0 million compared to $92.5 million for the comparable period in 2004. This decrease is primarily attributable to a decrease in payments for acquisitions and capital expenditures. Cash investments in acquisitions and international joint ventures for the nine months ended September 30, 2005 were $46.9 million versus $68.2 million in the comparable period in 2004. Capital expenditures were $20.1 million for the period compared to $23.3 million during the same period in 2004. The decrease is primarily attributable to higher investments being made to rollout the BioSystems program nationwide in 2004. At September 30, 2005 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. The implementation of our commitment to move away from incineration in North America 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 in North America is in the nature of a goal to be accomplished over an undetermined number of years. Because of uncertainties relating, among other things, to customer education and acceptance and legal requirements to incinerate portions of the medical waste, we do not have a timetable for this transition or specific plans to close any of our existing incinerators.
Net cash used in financing activities was $30.1 million during the nine months ended September 30, 2005 compared to net cash provided by financing activities of $12.6 million for the comparable period in 2004. This is primarily the result of the repurchase of 1,012,800 shares of common stock and decrease in proceeds received from the issuance of notes payable in the nine months ended September 30, 2005.
At September 30, 2005 we had $51.7 million outstanding related to promissory notes issued in connection with acquisitions.
Guarantees: We have guaranteed a loan to the Azoroa Bank in Japan 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 five-year loan with a current balance of $9.3 million with the Azoroa Bank that expires in June 2009. Management currently believes no amount will be paid under the guarantee.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
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 $1.82 million.
We have exposure to currency exchange rate fluctuations between the US dollar (USD) and UK pound sterling (GBP) related to a 13 million GBP intercompany loan with Stericycle International, Ltd., the parent company of 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
Disclosure Controls and Procedures
Our management, with the participation of our President and Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter covered by this Report. On the basis of this evaluation, our President and Chief Executive Officer and our Chief Financial Officer each concluded that our disclosure controls and procedures were effective.
The term "disclosure controls and procedures' is defined in Rule 13a-14(e) of the Securities Exchange Act of 1934 as "controls and other procedures designed to ensure that information required to be disclosed by the issuer in the reports, files or submits under the Act is recorded, processed, summarized and reported, within the time periods specified in the [Securities and Exchange] Commission's rules and forms." Our disclosure controls and procedures are designed to ensure that material information relating to us and our consolidated subsidiaries is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding our required disclosures.
Internal Control Over Financial Reporting
During the quarter ended September 30, 2005, 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 10, Legal Proceedings, in the Notes to the Condensed Consolidated Financial Statements. (Item 1 of Part 1).
ITEM 2. CHANGES IN SECURITIES, USES OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
The following table provides information about our purchases during the nine months ended September 30, 2005 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 Shares Paid per of Publicly Under the
(or Units) Share Announced Plans Plans or
Period Purchased (or Unit) or Programs Programs
===========================================================================================
January 1-January 31, 2005 -- -- -- 1,868,570
February 1-February 28, 2005 544,000 45.88 544,000 2,803,000
March 1-March 31, 2005 204,600 44.56 204,600 2,598,400
April 1-April 30, 2005 117,600 43.92 117,600 2,480,800
May 1-May 31, 2005 -- -- -- 2,480,800
June 1-June 30, 2005 -- -- -- 2,480,800
July 1-July 31, 2005 -- -- -- 2,480,800
August 1-August 31, 2005 -- -- -- 2,480,800
September 1-September 30, 2005 146,600 55.33 146,600 2,334,200
The 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 and amended in February 2005 to authorize the repurchase of an additional 1,478,430 shares. The plan does not have an expiration date.
ITEM 6. EXHIBITS
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 8, 2005.
STERICYCLE, INC.
(Registrant)
By:
/s/ Frank J.M. ten Brink
Frank J.M. ten Brink
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
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