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Section 1: 10-Q (10-Q)

srcl-10q_20180930.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2018

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 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 NO

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES NO

 

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

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

Emerging Growth Company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

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

 

On October 29, 2018, there were 90,594,855 shares of the Registrant’s Common Stock outstanding.

 

 

 


 

 

 

Table of Contents

 

 

Page No.

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.  Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2018 and 2017

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017

4

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

6

 

 

 

 

Condensed Consolidated Statements of Changes in Equity for the nine months ended September 30, 2018 and year ended December 31, 2017

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

 

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

37

 

 

 

 

Item 3.  Quantitative and Qualitative Disclosure about Market Risk

59

 

 

 

 

Item 4.  Controls and Procedures

60

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

Item 1.  Legal Proceedings

64

 

 

 

 

Item 1A.  Risk Factors

64

 

 

 

 

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

64

 

 

 

 

Item 6.  Exhibits

65

 

 

 

 

 

 

 

SIGNATURES

66

 

 

 

 

2018 Q3 10-Q Report

Stericycle, Inc.  •  2

 


 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

STERICYCLE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

 

In millions, except per share data

 

 

Three Months Ended September 30,

 

 

Nine Months Ended

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

$

854.9

 

 

$

882.8

 

 

$

2,633.2

 

 

$

2,692.9

 

Cost of revenues

 

519.4

 

 

 

514.7

 

 

 

1,585.9

 

 

 

1,574.4

 

Gross profit

 

335.5

 

 

 

368.1

 

 

 

1,047.3

 

 

 

1,118.5

 

Selling, general and administrative expenses

 

267.2

 

 

 

274.5

 

 

 

862.5

 

 

 

1,102.7

 

Income from operations

 

68.3

 

 

 

93.6

 

 

 

184.8

 

 

 

15.8

 

Interest expense, net

 

(27.7

)

 

 

(24.5

)

 

 

(77.3

)

 

 

(71.5

)

Other expense, net

 

(6.2

)

 

 

(2.3

)

 

 

(6.8

)

 

 

(5.5

)

Income (loss) before income taxes

 

34.4

 

 

 

66.8

 

 

 

100.7

 

 

 

(61.2

)

Income tax (expense) benefit

 

(10.9

)

 

 

(27.8

)

 

 

(27.1

)

 

 

14.6

 

Net income (loss)

 

23.5

 

 

 

39.0

 

 

 

73.6

 

 

 

(46.6

)

Net loss (income) attributable to noncontrolling interests

 

-

 

 

 

-

 

 

 

0.1

 

 

 

(0.2

)

Net income (loss) attributable to Stericycle, Inc.

 

23.5

 

 

 

39.0

 

 

 

73.7

 

 

 

(46.8

)

Mandatory convertible preferred stock dividend

 

(8.4

)

 

 

(8.9

)

 

 

(25.5

)

 

 

(27.5

)

Gain on repurchases of preferred stock

 

2.4

 

 

 

5.4

 

 

 

16.9

 

 

 

14.4

 

Net income (loss) attributable to Stericycle, Inc. common shareholders

$

17.5

 

 

$

35.5

 

 

$

65.1

 

 

$

(59.9

)

Earnings (loss) per common share attributable to Stericycle, Inc. common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.20

 

 

$

0.42

 

 

$

0.76

 

 

$

(0.70

)

Diluted

$

0.20

 

 

$

0.41

 

 

$

0.76

 

 

$

(0.70

)

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

86.7

 

 

 

85.3

 

 

 

85.9

 

 

 

85.3

 

Diluted

 

86.8

 

 

 

85.6

 

 

 

86.1

 

 

 

85.3

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

2018 Q3 10-Q Report

Stericycle, Inc.  •  3

 


 

STERICYCLE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

In millions

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income (loss)

$

23.5

 

 

$

39.0

 

 

$

73.6

 

 

$

(46.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

3.0

 

 

 

30.2

 

 

 

(56.9

)

 

 

80.8

 

Amortization of cash flow hedge into income, net of tax expense ($0.1 and $0.2, and $0.3 and $0.5) for the three and nine months ended September 30, 2018 and 2017, respectively)

 

0.3

 

 

 

0.3

 

 

 

0.8

 

 

 

0.8

 

Change in fair value of cash flow hedge, net of tax expense ($0.0 and $0.0, and $0.0 and $0.1 for the three and nine months ended September 30, 2018 and 2017, respectively)

 

-

 

 

 

-

 

 

 

-

 

 

 

0.2

 

Total other comprehensive income (loss)

 

3.3

 

 

 

30.5

 

 

 

(56.1

)

 

 

81.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

26.8

 

 

 

69.5

 

 

 

17.5

 

 

 

35.2

 

Less: comprehensive income (loss) attributable to noncontrolling interests

 

-

 

 

 

0.4

 

 

 

(0.7

)

 

 

1.1

 

Comprehensive income attributable to Stericycle, Inc. common shareholders

$

26.8

 

 

$

69.1

 

 

$

18.2

 

 

$

34.1

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

2018 Q3 10-Q Report

Stericycle, Inc.  •  4

 


 

STERICYCLE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

In millions, except per share data

 

 

September 30, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

52.0

 

 

$

42.2

 

Accounts receivable, less allowance for doubtful accounts of $70.2 in 2018 and $65.2 in 2017

 

607.4

 

 

 

624.1

 

Prepaid expenses

 

94.5

 

 

 

80.0

 

Other current assets

 

49.2

 

 

 

46.3

 

Assets held for sale

 

-

 

 

 

20.8

 

Total Current Assets

 

803.1

 

 

 

813.4

 

Property, plant and equipment, less accumulated depreciation of $691.1 in 2018 and $603.2 in 2017

 

755.1

 

 

 

741.0

 

Goodwill

 

3,613.8

 

 

 

3,604.0

 

Intangible assets, less accumulated amortization of $473.5 in 2018 and $392.5 in 2017

 

1,670.6

 

 

 

1,791.5

 

Other assets

 

60.3

 

 

 

38.4

 

Total Assets

$

6,902.9

 

 

$

6,988.3

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Current portion of long-term debt

$

109.3

 

 

$

119.5

 

Bank overdrafts

 

7.9

 

 

 

7.0

 

Accounts payable

 

222.8

 

 

 

195.2

 

Accrued liabilities

 

358.5

 

 

 

588.1

 

Other current liabilities

 

50.8

 

 

 

54.5

 

Liabilities held for sale

 

-

 

 

 

5.1

 

Total Current Liabilities

 

749.3

 

 

 

969.4

 

Long-term debt, net

 

2,720.8

 

 

 

2,615.3

 

Deferred income taxes

 

380.6

 

 

 

371.1

 

Long-term taxes payable

 

54.4

 

 

 

55.8

 

Other liabilities

 

65.2

 

 

 

68.1

 

Total Liabilities

 

3,970.3

 

 

 

4,079.7

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Preferred stock (par value $0.01 per share, 1.0 shares authorized), mandatory convertible preferred stock, Series A, 0.0 and 0.7 issued and outstanding in 2018 and 2017, respectively

-

 

 

-

 

Common stock (par value $0.01 per share, 120.0 shares authorized, 90.6 and 85.5 issued and outstanding in 2018 and 2017, respectively)

 

0.9

 

 

 

0.9

 

Additional paid-in capital

 

1,155.5

 

 

 

1,153.2

 

Retained earnings

 

2,107.6

 

 

 

2,029.5

 

Accumulated other comprehensive loss

 

(342.5

)

 

 

(287.0

)

Total Stericycle, Inc.’s Equity

 

2,921.5

 

 

 

2,896.6

 

Noncontrolling interests

 

11.1

 

 

 

12.0

 

Total Equity

 

2,932.6

 

 

 

2,908.6

 

Total Liabilities and Equity

$

6,902.9

 

 

$

6,988.3

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

2018 Q3 10-Q Report

Stericycle, Inc.  •  5

 


 

STERICYCLE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

In millions

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income (loss)

$

73.6

 

 

$

(46.6

)

Adjustments to reconcile net income (loss) to net cash from operating activities:

 

 

 

 

 

 

 

Depreciation

 

95.6

 

 

 

88.7

 

Intangible amortization

 

96.6

 

 

 

88.5

 

Stock-based compensation expense

 

19.5

 

 

 

17.3

 

Deferred income taxes

 

9.5

 

 

 

(156.2

)

Asset impairment charges and loss on disposal of assets held for sale

 

26.8

 

 

 

28.1

 

Other, net

 

(2.9

)

 

 

1.2

 

Changes in operating assets and liabilities, net of the effects of acquisitions and divestitures:

 

 

 

 

 

 

 

Accounts receivable

 

(1.8

)

 

 

17.1

 

Prepaid expenses

 

(22.5

)

 

 

(6.7

)

Accounts payable

 

17.8

 

 

 

(3.3

)

Accrued liabilities

 

(226.2

)

 

 

364.1

 

Other assets and liabilities

 

3.9

 

 

 

(0.2

)

Net cash from operating activities

 

89.9

 

 

 

392.0

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Capital expenditures

 

(96.9

)

 

 

(91.7

)

Payments for acquisitions, net of cash acquired

 

(39.6

)

 

 

(23.8

)

Proceeds from divestitures of businesses

 

25.2

 

 

 

1.2

 

Other, net

 

1.9

 

 

 

0.6

 

Net cash from investing activities

 

(109.4

)

 

 

(113.7

)

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Repayments of long-term debt and other obligations

 

(44.9

)

 

 

(46.4

)

Proceeds from foreign bank debt

 

8.7

 

 

 

2.5

 

Repayment of foreign bank debt

 

(14.9

)

 

 

(19.0

)

Repayment of term loan

 

(35.6

)

 

 

(100.0

)

Proceeds from senior credit facility

 

1,334.2

 

 

 

1,269.3

 

Repayment of senior credit facility

 

(1,189.1

)

 

 

(1,336.5

)

Proceeds from bank overdrafts, net

 

0.9

 

 

 

18.2

 

Payments of capital lease obligations

 

(5.1

)

 

 

(2.7

)

Payments of deferred financing costs

 

-

 

 

 

(2.7

)

Proceeds from issuance of common stock, net

 

20.1

 

 

 

5.0

 

Payments for repurchase of mandatory convertible preferred stock

 

(17.2

)

 

 

(30.8

)

Dividends paid on mandatory convertible preferred stock

 

(25.5

)

 

 

(27.5

)

Payments to noncontrolling interest

 

(0.2

)

 

 

(0.7

)

Net cash from financing activities

 

31.4

 

 

 

(271.3

)

Effect of exchange rate changes on cash and cash equivalents

 

(2.1

)

 

 

1.0

 

Net change in cash and cash equivalents

 

9.8

 

 

 

8.0

 

Cash and cash equivalents at beginning of period

 

42.2

 

 

 

44.2

 

Cash and cash equivalents at end of period

$

52.0

 

 

$

52.2

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Net issuances of obligations for acquisitions

$

27.7

 

 

$

7.8

 

Capital expenditures in accounts payable

$

18.2

 

 

$

4.5

 

Interest paid during the period, net of capitalized interest

$

62.2

 

 

$

58.9

 

Income taxes paid during the period, net of refunds

$

21.5

 

 

$

123.2

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

2018 Q3 10-Q Report

Stericycle, Inc.  •  6

 


 

STERICYCLE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

CHANGES IN EQUITY

(Unaudited)

 

In millions

 

 

Stericycle, Inc. Equity

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Additional Paid-In Capital

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Loss

 

 

Noncontrolling Interests

 

 

Total Equity

 

 

Shares

 

Amount

 

 

Shares

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2017

 

0.7

 

$

-

 

 

 

85.2

 

$

0.8

 

 

$

1,166.5

 

 

$

2,006.1

 

 

$

(367.6

)

 

$

10.6

 

 

$

2,816.4

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42.4

 

 

 

 

 

 

 

0.6

 

 

 

43.0

 

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

79.3

 

 

 

1.2

 

 

 

80.5

 

Change in qualifying cash flow hedge,

net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.3

 

 

 

 

 

 

 

1.3

 

Issuance of common stock for exercise of options and employee stock purchases, net

 

 

 

 

 

 

 

 

0.3

 

 

0.1

 

 

 

17.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17.3

 

Repurchase and cancellation of convertible preferred stock

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

(51.5

)

 

 

17.3

 

 

 

 

 

 

 

 

 

 

 

(34.2

)

Preferred stock dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(36.3

)

 

 

 

 

 

 

 

 

 

 

(36.3

)

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21.3

 

Payments to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.3

)

 

 

 

 

 

 

 

 

 

 

(0.4

)

 

 

(0.7

)

Balance as of December 31, 2017

 

0.7

 

 

-

 

 

 

85.5

 

 

0.9

 

 

 

1,153.2

 

 

 

2,029.5

 

 

 

(287.0

)

 

 

12.0

 

 

 

2,908.6

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

73.7

 

 

 

 

 

 

 

(0.1

)

 

 

73.6

 

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(56.3

)

 

 

(0.6

)

 

 

(56.9

)

Change in qualifying cash flow hedge,

net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.8

 

 

 

-

 

 

 

0.8

 

Issuance of common stock for exercise of options and employee stock purchases, net

 

 

 

 

 

 

 

 

0.4

 

 

 

 

 

 

16.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16.9

 

Repurchase and cancellation of convertible preferred stock

 

(0.1

)

 

 

 

 

 

 

 

 

 

 

 

 

(34.1

)

 

 

16.9

 

 

 

 

 

 

 

 

 

 

 

(17.2

)

Conversion of convertible preferred stock to common stock

 

(0.6

)

 

 

 

 

 

4.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

Preferred stock dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25.5

)

 

 

 

 

 

 

 

 

 

 

(25.5

)

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19.5

 

Payments to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.2

)

 

 

(0.2

)

Cumulative effect of new accounting standard (see Note 1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13.0

 

 

 

 

 

 

 

 

 

 

 

13.0

 

Balance as of September 30, 2018

 

-

 

$

-

 

 

 

90.6

 

$

0.9

 

 

$

1,155.5

 

 

$

2,107.6

 

 

$

(342.5

)

 

$

11.1

 

 

$

2,932.6

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.


 

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STERICYCLE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In millions, except per share data and unless otherwise indicated)

 

Unless the context requires otherwise, “Company”, “Stericycle”, "we," "us" or "our" refers to Stericycle, Inc. on a consolidated basis.

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

We are a multi-national business-to-business services company with a focus on regulated and compliance solutions for healthcare, retail, and commercial businesses.  This includes the collection and processing of regulated and specialized waste for disposal and the collection of personal and confidential information for secure destruction, plus a variety of training, consulting, recall/return, communication, and compliance services.

We were incorporated in 1989.  Today, we maintain operations in the United States (“U.S.”), Argentina, Australia, Belgium, Brazil, Canada, Chile, France, Germany, Ireland, Japan, Luxembourg, Mexico, the Netherlands, Portugal, Republic of Korea, Romania, Singapore, Spain, and the United Kingdom (“U.K.”) and serve a diverse customer base of more than one million.

Summary of Significant Accounting Policies

Basis of Presentation:  The accompanying Condensed Consolidated Financial Statements include the accounts of Stericycle, Inc. and its subsidiaries.  All intercompany accounts and transactions have been eliminated in consolidation.  The Company's Condensed Consolidated Financial Statements were prepared in accordance with United States’ Generally Accepted Accounting Principles (“U.S. GAAP”) and include the assets, liabilities, revenues and expenses of all wholly-owned subsidiaries and majority-owned subsidiaries over which the Company exercises control.  Outside shareholders' interests in subsidiaries are shown on the Condensed Consolidated Financial Statements as “Noncontrolling interests."

The accompanying unaudited Condensed Consolidated Financial Statements as of September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting and, therefore, do not include all information and footnote disclosures normally included in audited financial statements prepared in conformity with U.S. GAAP.  However, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the results of operations, financial position and cash flows have been made.  These Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”).  The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.

 

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Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Some areas where we make estimates include our allowance for doubtful accounts, credit memo reserve, accrued employee health and welfare benefits, environmental liabilities, stock-based compensation expense, income tax liabilities, accrued auto and workers’ compensation insurance claims, intangible asset valuations and goodwill impairment.  Such estimates are based on historical trends and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results could differ from our estimates.

The following information updates the description of significant accounting policies contained in Note 1 –  Basis of Presentation and Summary of Significant Accounting Policies in our Consolidated Financial Statements included in the Company’s 2017 Form 10-K.

Highly Inflationary Economy:  Effective July 1, 2018, as a result of the three-year cumulative inflation exceeding 100% and under the guidance given in ASC 830 “Foreign Currency Matters”, Argentina was classified as a highly inflationary economy. Accordingly, the Company recognized, in Other expense, net, a foreign exchange loss of $5.0 million arising from the remeasurement of our Argentinian peso denominated net monetary assets during the three months ended September 30, 2018.

Nonmonetary assets, liabilities and related expenses are measured using historical exchange rates and do not fluctuate with changes in the local exchange rate.

As of September 30, 2018, our Argentinian peso denominated net monetary assets amounted to approximately 430 million Argentinian pesos or $10.5 million.

Adoption of New Accounting Standards:

Revenue Recognition

Effective January 1, 2018, the Company adopted ASU No. 2014-19, “Revenue from Contracts with Customers” (“ASC 606”) using the modified retrospective method for all contracts that were not completed as of the date of adoption.  The results of operations for reported periods after January 1, 2018 are presented under this amended guidance, while prior period amounts are reported in accordance with ASC 605 Revenue Recognition, which is also referred to herein as “legacy U.S. GAAP” or historical guidance.

The impact of adopting ASC 606 relates to (i) the deferral of certain costs associated with obtaining contracts with customers, which were previously expensed as incurred, but under the new guidance are capitalized as Other current assets and Other assets and amortized to Selling, general and administrative expenses (“SG&A”) over the expected period of benefit to be received, (ii) the write off of deferred installation costs, which were capitalized as Prepaid expenses under legacy U.S. GAAP but are expensed as incurred under ASC 606 and (iii) an increase in Deferred income tax liabilities with respect to the tax impact associated with these items.  We recognized a net increase to Retained earnings of $13.0 million as of January 1, 2018 for the cumulative effect of adopting ASC 606.  This was comprised of $22.9 million associated with the capitalization of contract acquisition costs offset by a $4.9 million write off of deferred installation costs and $5.0 million to recognize Deferred income tax liabilities.

The impact to Income from operations from the adoption of ASC 606 was a decrease in SG&A of $1.3 million and $7.6 million for the three and nine months ended September 30, 2018, respectively.

 

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Definition of a Business

Effective January 1, 2018, the Company adopted ASU No. 2017-01, “Clarifying the Definition of a Business” (“ASU 2017-01”), which provides guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The amendments in ASU 2017-01 provide a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business.  The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business.  This screen reduces the number of transactions that need to be further evaluated.  If the screen is not met, the amendments require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and remove the evaluation of whether a market participant could replace the missing elements.  The guidance in ASU 2017-01 was applied in evaluating the transactions discussed in Note 3 – Acquisitions, but did not otherwise impact the accompanying Condensed Consolidated Financial Statements.  Due to the number of acquisitions the Company completes in any year, there may be instances where the acquisition will be determined to be an acquisition of assets instead of a business.  The Company believes this will be a minority of the acquisitions completed in any year and that there will not be a material impact to our financial statements.

Intra-Entity Transfers of Assets Other Than Inventory

On January 1, 2018, the Company adopted the guidance in ASU No. 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”).  ASU 2016-16 requires the income tax consequences of an intra-entity transfer of an asset other than inventory to be recognized when the transfer occurs, instead of when the asset is sold to an outside party.  The Company’s adoption of ASU 2016-16 did not have an impact on the accompanying Condensed Consolidated Financial Statements.

Compensation – Stock Compensation

On January 1, 2018, the Company adopted ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”).  ASU 2017-09 clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification.  Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions.  The Company’s adoption of ASU 2017-09 did not have an impact on the accompanying Condensed Consolidated Financial Statements.

Accounting Standards Issued But Not Yet Adopted

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “Leases” (Topic 842) (“ASU 2016-02”).  This guidance 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.  ASU 2016-02 also requires certain quantitative and qualitative disclosures.  Accounting guidance for lessors is largely unchanged.  The guidance must be applied at one of two application dates using a modified retrospective method. A cumulative effect adjustment to retained earnings will be recorded at the beginning of the earliest period presented or the effective date depending on the application date selected. This ASU is effective for the Company beginning January 1, 2019, and the Company expects to apply the standard’s transition

 

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provisions, and record the cumulative adjustment as of that date. In addition, the Company expects to avail itself of the package of practical expedients allowing the Company not to reassess (a) whether any expired or existing contact contains a lease, (b) the lease classification of any expired or existing leases, and (c) the initial direct costs for any existing leases. The Company previously engaged a third party service provider to assist in its implementation of the new leases standard and is continuing to gather, document and analyze lease agreements related to this ASU and anticipates recognizing material right-of-use assets and related liabilities upon adoption.  The Company has also selected and is advancing the process of implementing a software package, including user acceptance testing and training, to manage and account for leases under the new guidance.  Additionally, the Company is continuing to monitor industry activities and any additional guidance provided by or changed by regulators, standards setters, or the accounting profession to adjust the Company’s assessment and implementation plans accordingly.

Derivatives and Hedging

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging” (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”).  ASU 2017-12 amends the hedge accounting recognition and presentation requirements with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and enhance the transparency and understandability of hedge transactions.  In addition, ASU 2017-12 makes improvements to simplify the application of the hedge accounting guidance.  ASU 2017-12 is effective for us on January 1, 2019, with early adoption permitted.  The Company does not expect the adoption to materially impact our Condensed Consolidated Financial Statements.

Financial Instrument Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses” (“ASU 2016-13”) associated with the measurement of credit losses on financial instruments.  ASU 2016-13 replaces the current incurred loss impairment methodology of recognizing credit losses when a loss is probable, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to assess credit loss estimates.  The amended guidance is effective for us on January 1, 2020, with early adoption permitted beginning January 1, 2019.  We are evaluating the impact on our Condensed Consolidated Financial Statements.

Stranded Tax Effects

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which allows for stranded tax effects in accumulated other comprehensive income resulting from the U.S. Tax Cuts and Jobs Act of 2017 (the “Act”) to be reclassified to retained earnings.  ASU 2018-02 is effective for interim and annual periods beginning after December 15, 2018.  We will adopt ASU 2018-02 on January 1, 2019.  The adoption of ASU 2018-02 will result in a reclassification between accumulated other comprehensive income and retained earnings, and will have no impact on our results of operations or financial position.

Implementation Costs Incurred in a Cloud Computing Arrangement

In August 2018, the FASB issued ASU 2018-15, “Goodwill and Other Intangibles- Internal Use Software – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation

 

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costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs for internal-use software. The accounting for any hosting contract is unchanged. ASU 2018-15 is effective for us on January 1, 2020 with early adoption permitted, including adoption in any interim period. We are evaluating the impact on our Condensed Consolidated Financial Statements.

 

NOTE 2 – REVENUES FROM CONTRACTS WITH CUSTOMERS

In accordance with ASC 606, revenue is recognized when a customer obtains control of promised goods or services.  The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services. Revenue is recognized net of revenue-based taxes assessed by governmental authorities.

The Company provides regulated and compliance services, which include the collection and processing of regulated and specialized waste for disposal, the collection of personal and confidential information for secure destruction, recall and returns (“Expert Solutions”) and communication services.  The associated activities for each of these are a series of distinct services that are substantially the same and have the same pattern of transfer over time; therefore, the respective services are treated as a single performance obligation.

The Company recognizes revenue by applying the right to invoice practical expedient as our right to consideration corresponds directly to the value provided to the customer for performance to date. Revenues for our Medical Waste Solutions and Secure Information Destruction Services are recognized upon waste collection.  Our Compliance Solution revenues are recognized over the contractual service period.  Revenues from Hazardous Waste Solutions and Manufacturing and Industrial Services are recognized at the time the waste is received by a facility with an appropriate permit, either our processing facility or a third party.  Revenues from Communication Services and Expert Solutions are recorded as the services are performed.

Our customers typically enter into a contract for the provision of services on a regular and scheduled basis, e.g. weekly, monthly or on an as needed basis over the contract term.  Under the contract terms, the Company receives fees based on a monthly, quarterly or annual rate or fees based on contractual rates depending upon measures including the volume, weight and type of waste, number and size of containers collected, weight and type of shredded paper and number of call minutes.

Amounts are invoiced based on the terms of the underlying contract either on a regular basis, e.g., monthly or quarterly, or as services are performed and are generally due within a short period of time after invoicing based upon normal terms and conditions for our business type and the geography of the services performed.

 

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Disaggregation of Revenues

The following table presents our revenues disaggregated by service and primary geographical regions, and includes a reconciliation of disaggregated revenue to revenue reported by our reportable segments, Domestic and Canada Regulated Waste and Compliance Services (“RCS”) and International RCS:

 

In millions

 

 

Three Months Ended September 30, 2018

 

Reportable Segment

Domestic and Canada RCS

 

 

International RCS

 

 

All Other

 

 

 

 

 

Revenues by Service:

United States

 

Canada

 

 

Europe

 

Others

 

 

United States

 

 

Total

 

Medical Waste and Compliance Solutions

$

283.4

 

$

9.7

 

 

$

58.9

 

$

42.6

 

 

$

-

 

 

$

394.6

 

Secure Information Destruction Services

 

178.4

 

 

16.3

 

 

 

29.9

 

 

3.0

 

 

 

-

 

 

 

227.6

 

Manufacturing and Industrial Services

 

62.9

 

 

5.4

 

 

 

1.0

 

 

9.8

 

 

 

-

 

 

 

79.1

 

Hazardous Waste Solutions

 

82.0

 

 

-

 

 

 

-

 

 

-

 

 

 

-

 

 

 

82.0

 

Communication Services

 

-

 

 

3.5

 

 

 

4.0

 

 

-

 

 

 

37.2

 

 

 

44.7

 

Expert Solutions

 

-

 

 

2.7

 

 

 

1.9

 

 

-

 

 

 

22.3

 

 

 

26.9

 

Total

$

606.7

 

$

37.6

 

 

$

95.7

 

$

55.4

 

 

$

59.5

 

 

$

854.9

 

 

In millions

 

 

Nine Months Ended September 30, 2018

 

Reportable Segment

Domestic and Canada RCS

 

 

International RCS

 

 

All Other

 

 

 

 

 

Revenues by Service:

United States

 

Canada

 

 

Europe

 

Others

 

 

United States

 

 

Total

 

Medical Waste and Compliance Solutions

$

860.5

 

$

29.4

 

 

$

189.2

 

$

143.7

 

 

$

-

 

 

$

1,222.8

 

Secure Information Destruction Services

 

528.3

 

 

49.1

 

 

 

91.0

 

 

9.1

 

 

 

-

 

 

 

677.5

 

Manufacturing and Industrial Services

 

186.8

 

 

16.6

 

 

 

15.9

 

 

33.8

 

 

 

-

 

 

 

253.1

 

Hazardous Waste Solutions

 

235.0

 

 

-

 

 

 

-

 

 

-

 

 

 

-

 

 

 

235.0

 

Communication Services

 

-

 

 

12.7

 

 

 

13.3

 

 

-

 

 

 

112.9

 

 

 

138.9

 

Expert Solutions

 

-

 

 

8.9