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Section 1: 10-Q (10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[Mark One]

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

For the quarterly period ended June 30, 2019

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

SRCL

Nasdaq Global Select Market

 

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 such 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 (§232.405 of this chapter) 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 July 29, 2019, there were 91,120,794 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 (Loss) Income for the three and six months ended June 30, 2019 and 2018

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2019 and 2018

5

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018

7

 

 

 

 

Condensed Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2019 and 2018

8

 

 

 

 

Notes to Condensed Consolidated Financial Statements

10

 

 

 

 

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

34

 

 

 

 

Item 3.  Quantitative and Qualitative Disclosure about Market Risk

53

 

 

 

 

Item 4.  Controls and Procedures

53

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

Item 1.  Legal Proceedings

56

 

 

 

 

Item 1A.  Risk Factors

56

 

 

 

 

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

56

 

 

 

 

Item 6.  Exhibits

57

 

 

 

 

 

 

 

SIGNATURES

58

 

 

 

 

2019 Q2 10-Q Report

Stericycle, Inc.  •  2

 


 

Glossary of Defined Terms

Unless the context requires otherwise, the “Company,” “Stericycle,” "we," "us" or "our" refers to Stericycle, Inc. on a consolidated basis. The Company also uses several other terms in this Quarterly Report on Form 10-Q, most of which are explained or defined below:

Abbreviation

Description

2018 Form 10-K

Annual report on Form 10-K for the year ended December 31, 2018

Adjusted EBITDA

EBITDA adjusted for certain items discussed in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

APAC

Asia Pacific

ASC 606

Accounting Standards Codification Topic 606 "Revenue from Contracts with Customers"

ASC 740

Accounting Standards Codification Topic 740 "Income Taxes"

ASC 842

Accounting Standards Codification Section 842 "Leases"

ASU

Accounting Standards Update

Consolidated Leverage Ratio

Consolidated Leverage Ratio means, as of any date of determination, the ratio of (a) (i) Consolidated Funded Indebtedness as of such date minus (ii) Unrestricted Cash as of such date to (b) Consolidated EBITDA for the period of four fiscal quarters most recently ended on or prior to such date, as defined in the Fourth Amendment.

COR

Cost of revenues

COSO Framework

Internal Control Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission

Credit Agreement

Credit Agreement dated November 17, 2017 by and among the Company and certain of its subsidiaries named therein, Bank of America, N.A., as administrative agent, and the other financial institutions party thereto

CRS

Communication and Related Services

DOJ

U.S. Department of Justice

EBITDA

Earnings before interest, tax, depreciation and amortization

Environmental Solutions

Provider of Hazardous Waste Solutions and Manufacturing and Industrial Services

EPA

U.S. Environmental Protection Agency

EPM

Enterprise Performance Management

ERP

Enterprise Resource Planning

ESPP

Employee Stock Purchase Plan

Exchange Act

U.S. Securities Exchange Act 1934

Expert Solutions

Recall and return services

FASB

Financial Accounting Standards Board

FCPA

U.S. Foreign and Corrupt Practices Act

Fourth Amendment

Fourth Amendment to the Credit Agreement, dated as of June 14, 2019

Indenture

Indenture, dated as of June 14, 2019 between the Company, the guarantors named therein and U.S. Bank National Association, as trustee

IRS

U.S. Internal Revenue Service

PFA

Pre-filing agreement

PSU

Performance-based restricted stock unit

RWCS

Regulated Waste and Compliance Services

ROU

Right-of-use

RSU

Restricted stock unit

S&P

Standard & Poor's

SEC

U.S. Securities and Exchanges Commission

Senior Credit Facility

The Company's $1.2 billion senior credit facility due in 2022 granted under the terms of the Credit Agreement

Senior Notes

5.375% Senior Notes due July 2024

Series A

Series A Mandatory Convertible Preferred Stock, par value $0.01 per share

SG&A

Selling, general and administrative expenses

SOP

Sorted office paper

SOX

U.S. Sarbanes Oxley Act of 2002

SQ

Small quantity

SQ Settlement

Small quantity medical waste customers class action settlement

Tax Act

U.S. Tax Cuts and Jobs Act of 2017

Term Facility

Aggregate amount of commitments made by any lender under the terms of the Credit Agreement

Term Loans

Advances made by any lender under the Term Facility

U.K.

United Kingdom

U.S.

United States of America

U.S. GAAP

U.S. Generally Accepted Accounting Principles

 

 

2019 Q2 10-Q Report

Stericycle, Inc.  •  3

 


 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

STERICYCLE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(Unaudited)

 

In millions, except per share data

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues

$

845.8

 

 

$

883.3

 

 

$

1,675.9

 

 

$

1,778.3

 

Cost of revenues

 

543.2

 

 

 

530.0

 

 

 

1,076.2

 

 

 

1,066.5

 

Gross profit

 

302.6

 

 

 

353.3

 

 

 

599.7

 

 

 

711.8

 

Selling, general and administrative expenses

 

277.3

 

 

 

290.9

 

 

 

557.7

 

 

 

595.3

 

Goodwill impairment

 

-

 

 

 

-

 

 

 

20.9

 

 

 

-

 

Income from operations

 

25.3

 

 

 

62.4

 

 

 

21.1

 

 

 

116.5

 

Interest expense, net

 

(33.6

)

 

 

(24.6

)

 

 

(61.2

)

 

 

(49.6

)

Loss on early extinguishment of debt

 

(23.1

)

 

 

-

 

 

 

(23.1

)

 

 

-

 

Other expense, net

 

(1.8

)

 

 

(0.6

)

 

 

(4.0

)

 

 

(0.6

)

(Loss) Income before income taxes

 

(33.2

)

 

 

37.2

 

 

 

(67.2

)

 

 

66.3

 

Income tax benefit (expense)

 

3.0

 

 

 

(9.6

)

 

 

(0.6

)

 

 

(16.2

)

Net (loss) income

 

(30.2

)

 

 

27.6

 

 

 

(67.8

)

 

 

50.1

 

Net (income) loss attributable to noncontrolling interests

 

(0.3

)

 

 

0.1

 

 

 

(0.5

)

 

 

0.1

 

Net (loss) income attributable to Stericycle, Inc.

 

(30.5

)

 

 

27.7

 

 

 

(68.3

)

 

 

50.2

 

Mandatory convertible preferred stock dividend

 

-

 

 

 

(8.3

)

 

 

-

 

 

 

(17.1

)

Gain on repurchases of preferred stock

 

-

 

 

 

7.2

 

 

 

-

 

 

 

14.5

 

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

$

(30.5

)

 

$

26.6

 

 

$

(68.3

)

 

$

47.6

 

(Loss) earnings per common share attributable to Stericycle, Inc. common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.33

)

 

$

0.31

 

 

$

(0.75

)

 

$

0.56

 

Diluted

$

(0.33

)

 

$

0.31

 

 

$

(0.75

)

 

$

0.55

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

91.0

 

 

 

85.6

 

 

 

90.9

 

 

 

85.6

 

Diluted

 

91.0

 

 

 

85.8

 

 

 

90.9

 

 

 

85.8

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

2019 Q2 10-Q Report

Stericycle, Inc.  •  4

 


 

STERICYCLE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE (LOSS) INCOME

(Unaudited)

 

In millions

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net (loss) income

$

(30.2

)

 

$

27.6

 

 

$

(67.8

)

 

$

50.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(2.4

)

 

 

(76.2

)

 

 

6.1

 

 

 

(59.9

)

Amortization of cash flow hedge into income, net of tax ($0.1 and $0.1 and $0.2 and $0.2) for the three and six months ended June 30, 2019 and 2018, respectively)

 

0.2

 

 

 

0.4

 

 

 

0.4

 

 

 

0.5

 

Change in fair value of cash flow hedge, net of tax expense ($0.1 and $0.0 and $0.1 and $0.0) for the three and six months ended June 30, 2019 and 2018, respectively

 

0.2

 

 

 

-

 

 

 

0.2

 

 

 

-

 

Reclassification of cash flow hedge, net of tax ($1.1 for both the three and six months ended June 30, 2019)

 

2.3

 

 

 

-

 

 

 

2.3

 

 

 

-

 

Total other comprehensive income (loss)

 

0.3

 

 

 

(75.8

)

 

 

9.0

 

 

 

(59.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

(29.9

)

 

 

(48.2

)

 

 

(58.8

)

 

 

(9.3

)

Less: comprehensive income (loss) attributable to noncontrolling interests

 

0.3

 

 

 

(0.8

)

 

 

0.8

 

 

 

(0.7

)

Comprehensive loss attributable to Stericycle, Inc. common shareholders

$

(30.2

)

 

$

(47.4

)

 

$

(59.6

)

 

$

(8.6

)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

2019 Q2 10-Q Report

Stericycle, Inc.  •  5

 


 

STERICYCLE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

In millions, except per share data

 

 

June 30, 2019

 

 

December 31, 2018

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

34.5

 

 

$

34.3

 

Accounts receivable, less allowance for doubtful accounts of $75.1 in 2019 and $71.9 in 2018

 

613.7

 

 

 

599.6

 

Prepaid expenses

 

97.8

 

 

 

50.0

 

Other current assets

 

73.1

 

 

 

63.4

 

Total Current Assets

 

819.1

 

 

 

747.3

 

Property, plant and equipment, less accumulated depreciation of $737.8 in 2019 and $678.1 in 2018

 

786.2

 

 

 

743.5

 

Operating lease right-of-use assets

 

393.2

 

 

 

-

 

Goodwill

 

3,195.1

 

 

 

3,222.2

 

Intangible assets, less accumulated amortization of $572.7 in 2019 and $499.9 in 2018

 

1,562.8

 

 

 

1,637.7

 

Other assets

 

113.3

 

 

 

104.8

 

Total Assets

$

6,869.7

 

 

$

6,455.5

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Current portion of long-term debt

$

117.3

 

 

$

104.3

 

Bank overdrafts

 

2.2

 

 

 

14.8

 

Accounts payable

 

229.4

 

 

 

225.8

 

Accrued liabilities

 

303.8

 

 

 

340.8

 

Operating lease liabilities

 

89.5

 

 

 

-

 

Other current liabilities

 

42.0

 

 

 

47.5

 

Total Current Liabilities

 

784.2

 

 

 

733.2

 

Long-term debt, net

 

2,697.2

 

 

 

2,663.9

 

Long-term operating lease liabilities

 

317.2

 

 

 

-

 

Deferred income taxes

 

360.2

 

 

 

307.3

 

Long-term taxes payable

 

76.1

 

 

 

83.3

 

Other liabilities

 

72.6

 

 

 

70.7

 

Total Liabilities

 

4,307.5

 

 

 

3,858.4

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Preferred stock (par value $0.01 per share, 1.0 shares authorized), 0.0 issued and outstanding in 2019 and 2018, respectively

 

-

 

 

-

 

Common stock (par value $0.01 per share, 120.0 shares authorized, 91.1 and 90.7 issued and outstanding in 2019 and 2018, respectively)

 

0.9

 

 

 

0.9

 

Additional paid-in capital

 

1,192.8

 

 

 

1,162.6

 

Retained earnings

 

1,720.9

 

 

 

1,789.2

 

Accumulated other comprehensive loss

 

(356.6

)

 

 

(365.3

)

Total Stericycle, Inc.’s Equity

 

2,558.0

 

 

 

2,587.4

 

Noncontrolling interests

 

4.2

 

 

 

9.7

 

Total Equity

 

2,562.2

 

 

 

2,597.1

 

Total Liabilities and Equity

$

6,869.7

 

 

$

6,455.5

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

2019 Q2 10-Q Report

Stericycle, Inc.  •  6

 


 

STERICYCLE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

In millions

 

 

Six Months Ended June 30,

 

 

2019

 

 

2018

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net (loss) income

$

(67.8

)

 

$

50.1

 

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

 

 

 

 

 

 

 

Depreciation

 

64.7

 

 

 

63.5

 

Intangible amortization

 

74.7

 

 

 

64.8

 

Loss on early extinguishment of debt and related charges

 

26.5

 

 

 

-

 

Stock-based compensation expense

 

10.0

 

 

 

12.8

 

Deferred income taxes

 

12.8

 

 

 

(13.6

)

Goodwill and other impairment charges and gains on divestiture of businesses, net

 

23.7

 

 

 

18.9

 

Other, net

 

0.9

 

 

 

(1.5

)

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

 

 

 

 

 

 

 

Accounts receivable

 

(14.0

)

 

 

(23.5

)

Prepaid expenses

 

(22.4

)

 

 

(2.6

)

Accounts payable

 

3.6

 

 

 

13.8

 

Accrued liabilities

 

(50.6

)

 

 

39.2

 

Other assets and liabilities

 

8.9

 

 

 

9.1

 

Net cash from operating activities

 

71.0

 

 

 

231.0

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Capital expenditures

 

(108.2

)

 

 

(64.0

)

Payments for acquisitions, net of cash acquired

 

(0.3

)

 

 

(29.0

)

Proceeds from divestiture of businesses

 

13.6

 

 

 

8.2

 

Other, net

 

1.8

 

 

 

1.4

 

Net cash from investing activities

 

(93.1

)

 

 

(83.4

)

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Repayments of long-term debt and other obligations

 

(21.1

)

 

 

(29.8

)

Proceeds from foreign bank debt

 

9.0

 

 

 

6.9

 

Repayment of foreign bank debt

 

(4.5

)

 

 

(11.6

)

Proceeds from Term Loan

 

365.0

 

 

 

-

 

Repayment of Term Loan

 

(23.8

)

 

 

(23.8

)

Proceeds from issuance of Senior Notes

 

600.0

 

 

 

-

 

Proceeds from Senior Credit Facility

 

933.9

 

 

 

707.4

 

Repayment of Senior Credit Facility

 

(731.5

)

 

 

(766.7

)

Repayments of private placement notes

 

(1,075.0

)

 

 

-

 

Payments on early extinguishment of debt

 

(20.4

)

 

 

-

 

(Repayments of) proceeds from bank overdrafts, net

 

(12.1

)

 

 

0.2

 

Payments of capital lease obligations

 

(1.3

)

 

 

(2.7

)

Payment of debt issuance costs

 

(8.8

)

 

 

-

 

Proceeds from issuance of common stock, net of shares withheld for tax

 

13.9

 

 

 

8.8

 

Payments for repurchase of mandatory convertible preferred stock

 

-

 

 

 

(14.8

)

Dividends paid on mandatory convertible preferred stock

 

-

 

 

 

(17.1

)

Net cash from financing activities

 

23.3

 

 

 

(143.2

)

Effect of exchange rate changes on cash and cash equivalents

 

(1.0

)

 

 

(1.6

)

Net change in cash and cash equivalents

 

0.2

 

 

 

2.8

 

Cash and cash equivalents at beginning of period

 

34.3

 

 

 

42.2

 

Cash and cash equivalents at end of period

$

34.5

 

 

$

45.0

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Net issuances of obligations for acquisitions

$

0.3

 

 

$

21.7

 

Capital expenditures in accounts payable

$

30.6

 

 

$

5.5

 

Interest paid during the period, net of capitalized interest

$

48.8

 

 

$

42.5

 

Income taxes paid during the period, net of refunds

$

6.5

 

 

$

18.4

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

2019 Q2 10-Q Report

Stericycle, Inc.  •  7

 


 

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 April 1, 2019

 

-

 

$

-

 

 

 

 

 

90.8

 

$

0.9

 

 

 

 

$

1,171.2

 

 

 

 

$

1,751.4

 

 

 

 

$

(356.9

)

 

 

 

$

3.9

 

 

$

2,570.5

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30.5

)

 

 

 

 

 

 

 

 

 

 

0.3

 

 

 

(30.2

)

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2.4

)

 

 

 

 

 

 

 

 

(2.4

)

Change in qualifying cash flow hedge, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.4

 

 

 

 

 

 

 

 

 

0.4

 

Accelerated amortization of cash flow hedge, net of tax