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Section 1: 10-Q/A (10-Q/A)

srcl-10qa_20160331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

(Amendment No. 1)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016 or

o

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 1-37556

 

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  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES  x    NO  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

x

 

Accelerated filer

o

Non-accelerated filer

o

 

Smaller reporting company

o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  o    NO  x

On April 29, 2016 there were 84,912,603 shares of the Registrant’s Common Stock outstanding.

 

 


EXPLANATORY NOTE

Stericycle, Inc. (the “Company,” “we” or “our”) is filing this amended Quarterly Report on Form 10-Q/A because the Audit Committee of our Board of Directors has determined that the consolidated financial statements for the quarters ended March 31, 2015, June 30, 2015 and September 30, 2015, originally included in the Company’s Quarterly Reports on Form 10-Q for each of the respective quarterly periods, should no longer be relied upon due to errors in the timing of recognition of certain loss reserves. This Form 10-Q/A is being filed to present the amended and restated financial information for the first fiscal quarter of 2015 and, accordingly, to restate our analysis of the first quarter of 2016 when compared to the first quarter of 2015, as presented in the Company’s Form 10-Q for the first quarter of 2016 filed on May 9, 2016 (the “Original Form 10-Q”), and to disclose additional information regarding the Company’s internal control over financial reporting and disclosure controls and procedures related to these errors.

The errors in timing of recognition of certain loss reserves relate to the Company’s settlement of two previously disclosed litigation matters: first, a class action complaint filed in the Circuit Court of Cook County, Illinois captioned Sawyer v. Stericycle, Inc., et al., Case No. 2015 CH 07190  (the “TCPA Action”), alleging that from 2010 to 2014, the Company violated the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005; and second, a qui tam action filed in the U.S. District Court for the Northern District of Illinois captioned United States of America ex rel. Jennifer D. Perez v. Stericycle, Inc., Case No. 1:08-cv-2390 (the “Qui Tam Action”), alleging that from January 1, 2003 to June 30, 2014, the Company improperly increased its service price to certain government customers without their consent or contractual authorization, in violation of the False Claims Act and similar state statutes.

The identified accounting errors related to the timing of recognition of loss reserves between quarterly periods and had no effect on the Company’s audited annual results for the fiscal year ended December 31, 2015.

We originally recorded $45.0 million in accrued liabilities related to the TCPA Action in the second quarter of 2015; we are now of the view that this amount should have been recorded in the first quarter of 2015. In addition, we originally recorded $28.5 million in accrued liabilities related to the Qui Tam Action in the third quarter of 2015; we are now of the view that this amount also should have been recorded in the first quarter of 2015.

The impact of the restatement is as follows:  

 

·

the estimated loss contingency for the first quarter of fiscal 2015 was understated by $73.5 million, resulting in an overstatement of net income of $46.5 million for the three month period ended March 31, 2015;  

 

·

the estimated loss contingency for the second quarter of fiscal 2015 was overstated by $45.0 million, resulting in an understatement of net income of $27.4 million for the three month period ended June 30, 2015. For the six month period ended June 30, 2015, the estimated loss contingency was understated by $28.5 million, resulting in an overstatement of net income of $19.1 million for the six month period ended June 30, 2015; and

 

·

the estimated loss contingency for the third quarter of fiscal 2015 was overstated by $28.5 million, resulting in an understatement of net income of $17.2 million for the three month period ended September 30, 2015.

Accordingly, we are filing this Form 10-Q/A to correct the errors presented in the comparative financial information included in the Original Form 10-Q for the three months ended March 31, 2015.

The errors, including the specific line items on each of the Company’s financial statements that have been restated, are described in greater detail in Note A1 contained in this Form 10-Q/A.  We have made necessary conforming changes in Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q/A resulting from this adjustment.

The Company’s controls related to the accounting for loss contingencies were inadequate to ensure that loss reserves were recorded timely in the appropriate period. We are revising the COSO Component – Risk Assessment material weakness described in Item 4 of Part I, Controls and Procedures, to also encompass the accounting for loss contingencies.

For the convenience of the reader, this report on Form 10-Q/A sets forth the Original Form 10-Q in its entirety. The following sections of the Original Form 10-Q have been restated:

 

1)

Item 1 of Part I, Financial Statements;

 

2)

Item 2 of Part I, Management’s Discussion and Analysis of Financial Condition and Results of Operations;

 

3)

Item 4 of Part I, Controls and Procedures; and

 

4)

Item 6 of Part II, Exhibits.


Specifically, the following sections within Item 1 of Part I have been restated or added:

 

1)

Condensed Consolidated Statements of Income;

 

2)

Condensed Consolidated Statements of Comprehensive Income;

 

3)

Condensed Consolidated Statements of Cash Flows;

 

4)

Note A1 – Restatement;

 

5)

Note 5 – Income Taxes;

 

6)

Note 8 – Earnings per Common Share; and

 

7)

Note 12 – Geographic Information.

The Company has also included the signature page, the certifications of our Chief Executive Officer and Chief Financial Officer in Exhibits 31.3, 31.4, and 32.1, and financial statements formatted in Extensible Business Reporting Language (XBRL) in Exhibits 101.

Except as described above, no other amendments have been made to the Original Form 10-Q. The Company has not updated the disclosures contained herein to reflect events that have occurred since the date of the Original Form 10-Q. Accordingly, this amended quarterly report on Form 10-Q/A should be read in conjunction with the Company’s other filings made with the SEC subsequent to the filing of the Original Form 10-Q.

 

 


Stericycle, Inc.

Table of Contents

 

 

Page No.

PART I.  Financial Information

 

 

 

Item 1.  Financial Statements (Unaudited)

 

Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015

1

 

 

Condensed Consolidated Statements of Income for the three months ended March 31, 2016 and 2015

2

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015

3

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015

4

 

 

Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2016 and year ended December 31, 2015

5

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

25

 

 

Item 4.  Controls and Procedures

25

 

 

PART II.  Other Information

 

 

 

Item 1.  Legal Proceedings

27

 

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

Item 6.  Exhibits

28

 

 

Signatures

29

 

 

 


 

PART I. – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

In thousands, except share and per share data

 

 

 

March 31, 2016

 

 

December 31, 2015

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45,655

 

 

$

55,634

 

Short-term investments

 

 

64

 

 

 

69

 

Accounts receivable, less allowance for doubtful accounts of $22,964 in 2016 and $22,329 in 2015

 

 

622,709

 

 

 

614,494

 

Prepaid expenses

 

 

46,198

 

 

 

46,740

 

Other current assets

 

 

42,732

 

 

 

44,891

 

Total Current Assets

 

 

757,358

 

 

 

761,828

 

Property, plant and equipment, less accumulated depreciation of $453,753 in 2016 and $426,019 in 2015

 

 

677,525

 

 

 

665,602

 

Goodwill

 

 

3,790,016

 

 

 

3,758,177

 

Intangible assets, less accumulated amortization of $170,507 in 2016 and $151,025 in 2015

 

 

1,840,844

 

 

 

1,842,561

 

Other assets

 

 

46,801

 

 

 

49,282

 

Total Assets

 

$

7,112,544

 

 

$

7,077,450

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

114,066

 

 

$

161,409

 

Accounts payable

 

 

133,779

 

 

 

149,202

 

Accrued liabilities

 

 

218,933

 

 

 

197,329

 

Deferred revenues

 

 

17,543

 

 

 

16,989

 

Other current liabilities

 

 

68,192

 

 

 

62,420

 

Total Current Liabilities

 

 

552,513

 

 

 

587,349

 

Long-term debt, net of current portion

 

 

3,038,083

 

 

 

3,052,639

 

Deferred income taxes

 

 

617,011

 

 

 

608,272

 

Other liabilities

 

 

86,448

 

 

 

81,352

 

Equity:

 

 

 

 

 

 

 

 

Preferred stock (par value $0.01 per share, 1,000,000 shares authorized), Mandatory Convertible Preferred Stock, Series A, 770,000 issued and outstanding in 2016 and 2015

 

 

8

 

 

 

8

 

Common stock (par value $0.01 per share, 120,000,000 shares authorized, 84,829,822 issued and outstanding in 2016 and 84,852,584 issued and outstanding in 2015)

 

 

848

 

 

 

849

 

Additional paid-in capital

 

 

1,172,962

 

 

 

1,143,020

 

Accumulated other comprehensive loss

 

 

(265,018

)

 

 

(282,631

)

Retained earnings

 

 

1,897,636

 

 

 

1,868,645

 

Total Stericycle, Inc.’s Equity

 

 

2,806,436

 

 

 

2,729,891

 

Noncontrolling interest

 

 

12,053

 

 

 

17,947

 

Total Equity

 

 

2,818,489

 

 

 

2,747,838

 

Total Liabilities and Equity

 

$

7,112,544

 

 

$

7,077,450

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

1


 

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

In thousands, except share and per share data

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

 

2015

(Restated)

 

Revenues

 

$

874,181

 

 

$

663,319

 

Costs and Expenses:

 

 

 

 

 

 

 

 

Cost of revenues (exclusive of depreciation shown below)

 

 

482,356

 

 

 

367,340

 

Depreciation - cost of revenues

 

 

22,641

 

 

 

14,648

 

Selling, general and administrative expenses (exclusive of depreciation and amortization shown below)

 

 

202,488

 

 

 

214,863

 

Depreciation – selling, general and administrative expenses

 

 

7,499

 

 

 

4,118

 

Amortization

 

 

18,274

 

 

 

8,797

 

Total Costs and Expenses

 

 

733,258

 

 

 

609,766

 

Income from Operations

 

 

140,923

 

 

 

53,553

 

Other Income (Expense):

 

 

 

 

 

 

 

 

Interest income

 

 

21

 

 

 

35

 

Interest expense

 

 

(24,062

)

 

 

(18,633

)

Other expense, net

 

 

(1,251

)

 

 

(598

)

Total Other Expense

 

 

(25,292

)

 

 

(19,196

)

Income Before Income Taxes

 

 

115,631

 

 

 

34,357

 

Income tax expense

 

 

38,036

 

 

 

5,065

 

Net Income

 

 

77,595

 

 

 

29,292

 

Less: net income attributable to noncontrolling interests

 

 

809

 

 

 

352

 

Net Income Attributable to Stericycle, Inc.

 

 

76,786

 

 

 

28,940

 

Less: mandatory convertible preferred stock dividend

 

 

10,106

 

 

 

 

Net Income Attributable to Stericycle, Inc. Common Shareholders

 

$

66,680

 

 

$

28,940

 

Earnings Per Common Share Attributable to Stericycle, Inc. Common Shareholders:

 

 

 

 

 

 

 

 

Basic

 

$

0.79

 

 

$

0.34

 

Diluted

 

$

0.78

 

 

$

0.34

 

Weighted Average Number of Common Shares Outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

84,705,000

 

 

 

85,037,823

 

Diluted

 

 

85,845,501

 

 

 

86,357,006

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

2


 

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

In thousands

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

 

2015

(Restated)

 

Net Income

 

$

77,595

 

 

$

29,292

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income/ (Loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

17,164

 

 

 

(64,501

)

Amortization of cash flow hedge into income, net of tax (($172) and ($54), for the three months ended March 31, 2016 and 2015, respectively)

 

 

269

 

 

 

90

 

Change in fair value of cash flow hedge, net of tax (($89) and $2,381 for the three months ended March 31, 2016 and 2015, respectively)

 

 

242

 

 

 

(4,424

)

Total Other Comprehensive Income/ (Loss)

 

 

17,675

 

 

 

(68,835

)

 

 

 

 

 

 

 

 

 

Comprehensive Income/ (Loss)

 

 

95,270

 

 

 

(39,543

)

Less: comprehensive income/ (loss) attributable to noncontrolling interests

 

 

871

 

 

 

(468

)

Comprehensive Income/ (Loss) Attributable to Stericycle, Inc. Common Shareholders

 

$

94,399

 

 

$

(39,075

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

3


 

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

In thousands

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

 

2015

(Restated)

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

77,595

 

 

$

29,292

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

6,105

 

 

 

5,487

 

Excess tax benefit of stock options exercised

 

 

 

 

 

(8,222

)

Depreciation

 

 

30,140

 

 

 

18,766

 

Amortization

 

 

18,274

 

 

 

8,797

 

Deferred income taxes

 

 

6,932

 

 

 

(29,939

)

Other, net

 

 

(2,644

)

 

 

5,313

 

Changes in operating assets and liabilities, net of effect of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,918

)

 

 

(14,491

)

Accounts payable

 

 

(15,203

)

 

 

5,443

 

Accrued liabilities

 

 

21,151

 

 

 

109,424

 

Deferred revenues

 

 

487

 

 

 

(628

)

Other assets and liabilities

 

 

18,030

 

 

 

3,312

 

Net cash provided by operating activities

 

 

156,949

 

 

 

132,554

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Payments for acquisitions, net of cash acquired

 

 

(24,884

)

 

 

(34,210

)

Proceeds from investments

 

 

7

 

 

 

257

 

Proceeds from sale of property and equipment

 

 

766

 

 

 

 

Capital expenditures

 

 

(34,185

)

 

 

(21,356

)

Net cash used in investing activities

 

 

(58,296

)

 

 

(55,309

)

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Repayments of long-term debt and other obligations

 

 

(6,879

)

 

 

(9,780

)

Proceeds from foreign bank debt

 

 

15,607

 

 

 

4,851

 

Repayments of foreign bank debt

 

 

(18,721

)

 

 

(38,252

)

Proceeds from term loan

 

 

 

 

 

250,000

 

Repayment of term loan

 

 

(171,000

)

 

 

 

Proceeds from senior credit facility

 

 

457,959

 

 

 

394,097

 

Repayments of senior credit facility

 

 

(353,520

)

 

 

(670,254

)

Payments of capital lease obligations

 

 

(1,381

)

 

 

(988

)

Payment of cash flow hedge

 

 

 

 

 

(8,833

)

Purchases and cancellations of treasury stock

 

 

(37,693

)

 

 

(11,516

)

Proceeds from issuance of common stock

 

 

22,310

 

 

 

27,452

 

Dividends paid on mandatory convertible preferred stock

 

 

(10,106

)

 

 

 

Excess tax benefit of stock options exercised

 

 

 

 

 

8,222

 

Payments to noncontrolling interests

 

 

(4,997

)

 

 

(2,603

)

Net cash used in financing activities

 

 

(108,421

)

 

 

(57,604

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(211

)

 

 

(3,594

)

Net (decrease)/ increase in cash and cash equivalents

 

 

(9,979

)

 

 

16,047

 

Cash and cash equivalents at beginning of period

 

 

55,634

 

 

 

22,236

 

Cash and cash equivalents at end of period

 

$

45,655

 

 

$

38,283

 

 

 

 

 

 

 

 

 

 

NON-CASH INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Issuances of obligations for acquisitions

 

$

13,013

 

 

$

21,543

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


 

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Three Months Ended March 31, 2016 and Year Ended December 31, 2015

(Unaudited)

 

In thousands

 

 

 

Stericycle, Inc. Equity

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Additional

Paid-In Capital

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Noncontrolling Interest

 

 

Total Equity

 

Balance at January 1, 2015

 

 

 

 

$

 

 

 

84,884

 

 

$

849

 

 

$

289,211

 

 

$

1,743,371

 

 

$

(138,419

)

 

$

22,173

 

 

$

1,917,185

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

267,046

 

 

 

 

 

 

 

967

 

 

 

268,013

 

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(140,809

)

 

 

161

 

 

 

(140,648

)

Change in qualifying cash flow hedge, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,403

)

 

 

 

 

 

 

(3,403

)

Issuance of common stock for exercise of options, restricted stock units and employee stock purchases

 

 

 

 

 

 

 

 

 

 

973

 

 

 

10

 

 

 

68,630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

68,640

 

Issuance of mandatory convertible preferred stock

 

770

 

 

8

 

 

 

 

 

 

 

 

 

 

 

746,892

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

746,900

 

Purchase and cancellation of treasury stock

 

 

 

 

 

 

 

 

 

 

(1,004

)

 

 

(10

)

 

 

 

 

 

 

(131,666

)

 

 

 

 

 

 

 

 

 

 

(131,676

)

Preferred stock dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,106

)

 

 

 

 

 

 

 

 

 

 

(10,106

)

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,750

 

Excess tax benefit of stock options exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,897

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,897

 

Reduction to noncontrolling interests due to additional ownership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(360

)

 

 

 

 

 

 

 

 

 

 

(5,354

)

 

 

(5,714

)

Balance at December 31, 2015

 

 

770

 

 

 

8

 

 

 

84,853

 

 

 

849

 

 

 

1,143,020

 

 

 

1,868,645

 

 

 

(282,631

)

 

 

17,947

 

 

 

2,747,838

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

76,786

 

 

 

 

 

 

 

809

 

 

 

77,595

 

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17,102

 

 

 

62

 

 

 

17,164

 

Change in qualifying cash flow hedge, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

511

 

 

 

 

 

 

 

511

 

Issuance of common stock for exercise of options, restricted stock units and employee stock purchases

 

 

 

 

 

 

 

 

 

 

305

 

 

 

3

 

 

 

22,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,873

 

Purchase and cancellation of treasury stock

 

 

 

 

 

 

 

 

 

 

(328

)

 

 

(4

)

 

 

 

 

 

 

(37,689

)

 

 

 

 

 

 

 

 

 

 

(37,693

)

Preferred stock dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,106

)

 

 

 

 

 

 

 

 

 

 

(10,106

)

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,105

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,105

 

Reduction to noncontrolling interests due to additional ownership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

967

 

 

 

 

 

 

 

 

 

 

 

(6,765

)

 

 

(5,798

)

Balance at March 31, 2016

 

 

770

 

 

$

8

 

 

 

84,830

 

 

$

848

 

 

$

1,172,962

 

 

$

1,897,636

 

 

$

(265,018

)

 

$

12,053

 

 

$

2,818,489

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

5


 

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 A1 — RESTATEMENT

The unaudited quarterly financial data for the quarter ended March 31, 2015 has been restated for errors related to the timing of recognition of loss reserves between quarterly periods associated with the Company’s previously disclosed settlement of the TCPA Action and Qui Tam Action. The Company determined that the estimated loss contingency for the first quarter of fiscal 2015 was understated by $73.5 million, resulting in an overstatement of net income of $46.5 million for the three month period ended March 31, 2015.

The Company’s Condensed Consolidated Statements of Income; Condensed Consolidated Statements of Comprehensive Income; Condensed Consolidated Statements of Cash Flows; Note 5 - Income Taxes; Note 8 - Earnings Per Common Share; and Note 12 - Geographic Information; included in this Form 10-Q/A have been restated to correct the misstatements described above.

The following are previously reported and restated balances of affected line items in the Condensed Consolidated Statement of Income and Condensed Consolidated Statement of Comprehensive Income, and the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2015 (Unaudited).

 

Condensed Consolidated Statement of Income

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2015

 

 

As Reported

 

Adjustment

 

Restated

 

Selling, general and administrative expenses (exclusive of

depreciation and amortization)

$

141,363

 

$

73,500

 

$

214,863

 

Total costs and expenses

 

536,266

 

 

73,500

 

 

609,766

 

Income from operations

 

127,053

 

 

(73,500

)

 

53,553

 

Income before income taxes

 

107,857

 

 

(73,500

)

 

34,357

 

Income tax expense

 

32,047

 

 

(26,982

)

 

5,065

 

Net income

 

75,810

 

 

(46,518

)

 

29,292

 

Net income attributable to Stericycle, Inc.

 

75,458

 

 

(46,518

)

 

28,940

 

EPS – basic

 

0.89

 

 

(0.55

)

 

0.34

 

EPS – diluted

 

0.87

 

 

(0.53

)

 

0.34

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Comprehensive Income

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2015

 

 

As Reported

 

Adjustment

 

Restated

 

Net income

$

75,810

 

$

(46,518

)

$

29,292

 

Comprehensive income/ (loss)

 

6,975

 

 

(46,518

)

 

(39,543

)

Comprehensive income/ (loss)attributable to Stericycle, Inc.

 

7,443

 

 

(46,518

)

 

(39,075

)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows

Three Months Ended March 31, 2015

 

 

As Reported

 

Adjustment

 

Restated

 

Net income

$

75,810

 

$

(46,518

)

$

29,292

 

Deferred income taxes

 

(2,957

)

 

(26,982

)

 

(29,939

)

Accrued liabilities

 

35,924

 

 

73,500

 

 

109,424

 

 

The restatement had no impact on net cash used in or provided by operating, investing and financing activities and there was no change to the reported net increase in cash and cash equivalents.

 

 

6


 

 

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. However, the Company believes the disclosures included in the accompanying condensed consolidated financial statements are adequate to make the information presented not misleading. In our opinion, all adjustments necessary for a fair presentation for the periods presented have been reflected and are of a normal recurring nature. These condensed consolidated financial statements should be read in conjunction with the Stericycle, Inc. and Subsidiaries Consolidated Financial Statements and notes thereto for the year ended December 31, 2015, as filed with our Annual Report on Form 10-K for the year ended December 31, 2015. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2016.

There were no material changes in the Company’s significant accounting policies since the filing of its 2015 Form 10-K. As discussed in the 2015 Form 10-K, the preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates.

We have evaluated subsequent events through the date of filing this quarterly report on Form 10-Q. No events have occurred that would require adjustment to or disclosure in the condensed consolidated financial statements.

 

 

NOTE 2 – ACQUISITIONS

The following table summarizes the locations of our acquisitions for the three months ended March 31, 2016

 

Acquisition Locations

 

2016

 

United States

 

 

5

 

Romania

 

 

1

 

Spain

 

 

1

 

Total

 

 

7

 

 

During the quarter ended March 31, 2016, we completed seven acquisitions. Domestically, we acquired 100% of the stock of one regulated waste business and selected assets of four secure information destruction businesses. Internationally, we acquired selected assets of one regulated waste business in Romania and one in Spain.

The following table summarizes the aggregate purchase price paid for acquisitions and other adjustments of consideration to be paid for acquisitions during the three months ended March 31:

 

In thousands

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Cash

 

$

24,884

 

 

$

34,210

 

Promissory notes

 

 

11,595

 

 

 

7,618

 

Deferred consideration

 

 

1,361

 

 

 

624

 

Contingent consideration

 

 

57

 

 

 

13,301

 

Total purchase price

 

$

37,897

 

 

$

55,753

 

 

During the three months ended March 31, 2016, we recognized a net increase in goodwill of $25.5 million, excluding the effect of foreign currency translation (see Note 9 – Goodwill and Other Intangible Assets). A net increase of $23.7 million was assigned to our United States reportable segment, and a net increase of $1.8 million was assigned to our International reportable segment. Approximately $20.7 million of the goodwill recognized during the three months ended March 31, 2016 will be deductible for income taxes.

7


 

During the three months ended March 31, 2016, we recognized a net increase in intangible assets from acquisitions of $8.4 million, excluding the effect of foreign currency translation. The changes include $7.7 million in the estimated fair value of acquired customer relationships with amortizable lives of 10 to 40 years and $0.7 million in covenant not-to-compete with an amortizable life of 5 years.

The purchase prices for these acquisitions in excess of acquired tangible and identifiable intangible assets have been primarily allocated to goodwill, and are preliminary, pending completion of certain intangible asset valuations and finalization of the opening balance sheet. The following table summarizes the preliminary purchase price allocation for current period acquisitions and other adjustments to purchase price allocations during the three months ended March 31:

 

In thousands

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Fixed assets

 

$

3,345

 

 

$

(1,477

)

Intangibles

 

 

8,436

 

 

 

19,791

 

Goodwill

 

 

25,519

 

 

 

41,190

 

Accounts receivable

 

 

1,715

 

 

 

4,217

 

Net other assets/ (liabilities)

 

 

133

 

 

 

59

 

Current liabilities

 

 

(201

)

 

 

(4,650

)

Net deferred tax liabilities

 

 

(1,050

)

 

 

(3,377

)

Total purchase price allocation

 

$

37,897

 

 

$

55,753

 

 

During the three months ended March 31, 2016 and 2015, the Company incurred $3.0 million and $3.3 million, respectively, of acquisition related expenses. These expenses are included with “Selling, general and administrative expenses” (“SG&A”) on our Condensed Consolidated Statements of Income. The results of operations of these acquired businesses have been included in the Condensed Consolidated Statements of Income from the date of the acquisition.

 

 

NOTE 3 – NEW ACCOUNTING STANDARDS

Accounting Standards Recently Adopted

Compensation - Stock Compensation

On January 1, 2016, the Company adopted the guidance in Accounting Standards Update ("ASU") No. 2016-09, “Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting.” Under this ASU, entities are permitted to make an accounting policy election to either estimate forfeitures on share-based payment awards, as previously required, or to recognize forfeitures as they occur. The Company has elected to recognize forfeitures as they occur and the impact of that change in accounting policy has been evaluated and determined to be insignificant and resulted in no cumulative-effect change to the Company’s retained earnings. Additionally, ASU 2016-09 requires that all income tax effects related to settlements of share-based payment awards be reported in earnings as an increase or decrease to income tax expense (benefit), net. Previously, income tax benefits at settlement of an award were reported as an increase (or decrease) to additional paid-in capital to the extent that those benefits were greater than (or less than) the income tax benefits reported in earnings during the award's vesting period. The requirement to report those income tax effects in earnings has been applied on a prospective basis to settlements occurring on or after January 1, 2016 and the impact of applying that guidance was $2.9 million to the condensed consolidated financial statements for the period ended March 31, 2016. ASU 2016-09 also requires that all income tax-related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows. Previously, income tax benefits at settlement of an award were reported as a reduction to operating cash flows and an increase to financing cash flows to the extent that those benefits exceeded the income tax benefits reported in earnings during the award's vesting period. The Company has elected to apply that change in cash flow classification on a prospective basis, leaving previously reported net cash provided by operating activities and net cash used in financing activities in the accompanying Condensed Consolidated Statement of Cash Flows for the period ended March 31, 2015 unchanged. The remaining provisions of ASU 2016-09 did not have a material impact on the accompanying condensed consolidated financial statements.

8


 

Accounting Standards Issued But Not Yet Adopted

Revenue From Contracts With Customers

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), guidance to provide a single and comprehensive revenue recognition model for all contracts with customers. The revenue guidance contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The amended authoritative guidance associated with revenue recognition is effective for the Company on January 1, 2018. The amended guidance may be applied retrospectively for all periods presented or retrospectively with the cumulative effect of initially applying the amended guidance recognized at the date of initial application. We are in the process of assessing the provisions of the new revenue recognition standard and have not determined whether the adoption will have a material impact on our consolidated financial statements.

 

Leases

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842). This ASU will require lessees to record a right-of-use asset and lease liability on the balance sheet for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. This ASU also requires certain quantitative and qualitative disclosures. Accounting guidance for lessors is largely unchanged. The amendments should be applied on a modified retrospective basis. ASU 2016-02 is effective for us beginning January 1, 2019. We are beginning to evaluate the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements and related disclosures.

 

 

NOTE 4 – FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Inputs that are generally unobservable and typically reflect management’s judgment about the assumptions that market participants would use in pricing the asset or liability.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels. The impact of our creditworthiness has been considered in the fair value measurements noted below. In addition, the fair value measurement of a liability must reflect the nonperformance risk of an entity. There were no movements of items between fair value hierarchies.

9


 

 

In thousands

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

Total as of

March 31, 2016

 

 

Level 1

Inputs

 

 

Level 2

Inputs

 

 

Level 3

Inputs

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45,655

 

 

$

45,655

 

 

$

 

 

$

 

Short-term investments

 

 

64

 

 

$

64