UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 |
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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 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.
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Large accelerated filer ☒ |
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Accelerated filer ☐ |
Non-accelerated filer ☐ |
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Smaller reporting company ☐ |
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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 April 30, 2019, there were
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Table of Contents
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Page No. |
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited) |
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4 |
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5 |
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Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 |
6 |
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Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 |
7 |
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8 |
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9 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
29 |
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Item 3. Quantitative and Qualitative Disclosure about Market Risk |
42 |
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42 |
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PART II. OTHER INFORMATION
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45 |
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45 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
45 |
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46 |
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47 |
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2019 Q1 10-Q Report |
Stericycle, Inc. • 2 |
Glossary of Defined Terms
Unless the context requires otherwise, “Company”, “Stericycle”, "we," "us" or "our" refers to Stericycle, Inc. on a consolidated basis. We also have used several other terms in this Quarterly Report on Form 10-Q, most of which are explained or defined below:
|
Abbreviation |
Description |
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2018 Form 10-K |
Annual report on Form 10-K for the year ended December 31, 2018 |
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Adjusted EBITDA |
EBITDA adjusted for certain items discussed in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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APAC |
Asia Pacific |
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ASC 606 |
Accounting Standards Codification Topic 606 "Revenues from Contracts with Customers" |
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ASC 740 |
Accounting Standards Codification Topic 740 "Income Taxes" |
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ASC 842 |
Accounting Standards Codification Topic 842 "Leases" |
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ASU |
Accounting Standards Update |
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Canada ESPP |
Canadian Employee Stock Purchase Plan |
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COR |
Cost of revenues |
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COSO Framework |
Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission |
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CRS |
Communication and Related Services |
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DOJ |
United States' Department of Justice |
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EMEAA |
Europe, Middle East, Africa and Asia |
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E.U. |
European Union |
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EBITDA |
Earnings before interest, tax, depreciation and amortization |
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EPA |
United States' Environmental Protection Agency |
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EPM |
Enterprise Performance Management |
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ERP |
Enterprise Resource Planning |
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ESPP |
Employee Stock Purchase Plan |
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Exchange Act |
Securities and Exchange Act of 1934 |
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Expert Solutions |
Recall and return services |
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FASB |
Financial Accounting Standards Board |
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FCPA |
United States' Foreign Corrupt Practices Act |
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IRS |
United States' Internal Revenue Service |
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PFA |
Pre-filing agreement |
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PMO |
Project Management Office |
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PSU |
Performance-based restricted stock unit |
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RCS |
Regulated Waste and Compliance Services |
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ROU |
Right-of-use |
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RSU |
Restricted stock unit |
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S&P |
Standard & Poor's |
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SEC |
United States Securities and Exchange Commission |
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Series A |
Series A Mandatory Convertible Preferred Stock, par value $0.01 per share |
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SG&A |
Selling, general and administrative expenses |
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SOX |
United States Sarbanes-Oxley Act of 2002 |
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SQ |
Small quantity |
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SQ Settlement |
Small quantity medical waste customers class action settlement |
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Tax Act |
United States Tax Cuts and Jobs Act of 2017 |
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U.K. |
United Kingdom |
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U.S. |
United States of America |
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U.S. GAAP |
United States Generally Accepted Accounting Principles |
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2019 Q1 10-Q Report |
Stericycle, Inc. • 3 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
STERICYCLE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(Unaudited)
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In millions, except per share data |
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Three Months Ended March 31, |
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2019 |
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2018 |
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Revenues |
$ |
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$ |
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Cost of revenues |
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Gross profit |
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Selling, general and administrative expenses |
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Goodwill impairment |
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- |
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(Loss) income from operations |
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( |
) |
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Interest expense, net |
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( |
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( |
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Other expense, net |
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( |
) |
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- |
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(Loss) income before income taxes |
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( |
) |
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Income tax expense |
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( |
) |
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( |
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Net (loss) income |
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( |
) |
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Net income attributable to noncontrolling interests |
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( |
) |
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- |
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Net (loss) income attributable to Stericycle, Inc. |
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( |
) |
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Mandatory convertible preferred stock dividend |
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- |
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( |
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Gain on repurchases of preferred stock |
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- |
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Net (loss) income attributable to Stericycle, Inc. common shareholders |
$ |
( |
) |
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$ |
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(Loss) earnings per common share attributable to Stericycle, Inc. common shareholders: |
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Basic |
$ |
( |
) |
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$ |
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Diluted |
$ |
( |
) |
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$ |
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Weighted average number of common shares outstanding: |
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Basic |
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Diluted |
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See accompanying Notes to Condensed Consolidated Financial Statements.
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2019 Q1 10-Q Report |
Stericycle, Inc. • 4 |
STERICYCLE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE (LOSS) INCOME
(Unaudited)
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In millions |
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Three Months Ended March 31, |
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2019 |
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2018 |
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Net (loss) income |
$ |
( |
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$ |
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Other comprehensive income: |
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Currency translation adjustments |
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Amortization of cash flow hedge into income, net of tax expense ($ |
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Total other comprehensive income |
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Comprehensive (loss) income |
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( |
) |
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Less: comprehensive income attributable to noncontrolling interests |
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Comprehensive (loss) income attributable to Stericycle, Inc. common shareholders |
$ |
( |
) |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
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2019 Q1 10-Q Report |
Stericycle, Inc. • 5 |
STERICYCLE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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In millions, except per share data |
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March 31, 2019 |
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December 31, 2018 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
$ |
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$ |
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Accounts receivable, less allowance for doubtful accounts of $ |
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Prepaid expenses |
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Other current assets |
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Total Current Assets |
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Property, plant and equipment, less accumulated depreciation of $ |
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Operating lease right-of-use assets |
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- |
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Goodwill |
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Intangible assets, less accumulated amortization of $ |
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Other assets |
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Total Assets |
$ |
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$ |
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LIABILITIES AND EQUITY |
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Current Liabilities: |
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Current portion of long-term debt |
$ |
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$ |
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Bank overdrafts |
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Accounts payable |
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Accrued liabilities |
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Operating lease liabilities |
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- |
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Other liabilities |
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Total Current Liabilities |
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Long-term debt, net |
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Long-term operating lease liabilities |
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- |
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Deferred income taxes |
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Long-term taxes payable |
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Other long-term liabilities |
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Total Liabilities |
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Commitments and contingencies |
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Equity: |
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Preferred stock (par value $ |
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Common stock (par value $ |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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( |
) |
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( |
) |
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Total Stericycle, Inc.’s Equity |
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Noncontrolling interests |
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Total Equity |
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Total Liabilities and Equity |
$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
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2019 Q1 10-Q Report |
Stericycle, Inc. • 6 |
STERICYCLE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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In millions |
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Three Months Ended March 31, |
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2019 |
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2018 |
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OPERATING ACTIVITIES: |
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Net (loss) income |
$ |
( |
) |
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$ |
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Adjustments to reconcile net (loss) income to net cash from operating activities: |
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Depreciation |
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Intangible amortization |
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Stock-based compensation expense |
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Deferred income taxes |
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( |
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Asset impairment charges and gain on divestiture of business, net |
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Other, net |
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( |
) |
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( |
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Changes in operating assets and liabilities, net of the effects of acquisitions and divestitures: |
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Accounts receivable |
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( |
) |
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( |
) |
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Prepaid expenses |
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( |
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Accounts payable |
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( |
) |
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( |
) |
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Accrued liabilities |
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( |
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Other assets and liabilities |
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Net cash from operating activities |
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INVESTING ACTIVITIES: |
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Capital expenditures |
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( |
) |
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( |
) |
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Payments for acquisitions, net of cash acquired |
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( |
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( |
) |
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Proceeds from divestiture of business |
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- |
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Other, net |
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Net cash from investing activities |
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( |
) |
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( |
) |
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FINANCING ACTIVITIES: |
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Repayments of long-term debt and other obligations |
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( |
) |
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( |
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Proceeds from foreign bank debt |
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Repayment of foreign bank debt |
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( |
) |
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( |
) |
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Repayment of term loan |
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( |
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( |
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Proceeds from senior credit facility |
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Repayment of senior credit facility |
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( |
) |
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( |
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(Repayments of) proceeds from bank overdrafts, net |
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( |
) |
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Payments of capital lease obligations |
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( |
) |
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( |
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Proceeds from issuance of common stock, net of shares withheld for tax |
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Payments for repurchase of mandatory convertible preferred stock |
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- |
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( |
) |
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Dividends paid on mandatory convertible preferred stock |
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- |
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( |
) |
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Net cash from financing activities |
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( |
) |
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Effect of exchange rate changes on cash and cash equivalents |
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( |
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Net change in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ |
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$ |
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SUPPLEMENTAL CASH FLOW INFORMATION: |
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Net issuances of obligations for acquisitions |
$ |
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$ |
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Accrued capital expenditures |
$ |
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$ |
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Interest paid during the period, net of capitalized interest |
$ |
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$ |
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Income taxes paid during the period, net of refunds |
$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
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2019 Q1 10-Q Report |
Stericycle, Inc. • 7 |
STERICYCLE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN EQUITY
(Unaudited)
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In millions |
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Stericycle, Inc. Equity |
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Preferred Stock |
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Common Stock |
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Additional Paid-In Capital |
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Retained Earnings |
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Accumulated Other Comprehensive Loss |
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Noncontrolling Interests |
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Total Equity |
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Shares |
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Amount |
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Shares |
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Amount |
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Balance as of January 1, 2019 |
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$ |
- |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Net (loss) income |
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( |
) |
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( |
) |
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Currency translation adjustment |
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Change in qualifying cash flow hedge, net of tax |
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Issuance of common stock for exercise of options, RSU vesting and employee stock purchases, net |
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- |
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( |
) |
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( |
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Stock compensation expense |
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Change in noncontrolling interest |
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( |
) |
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- |
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Balance as of March 31, 2019 |
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$ |
- |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Stericycle, Inc. Equity |
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Preferred Stock |
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Common Stock |
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Additional Paid-In Capital |
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Retained Earnings |
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Accumulated Other Comprehensive Loss |
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Noncontrolling Interests |
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Total Equity |
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Shares |
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Amount |
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Shares |
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Amount |
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Balance as of January 1, 2018 |
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$ |
- |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Cumulative effect of new accounting standard, net of tax |
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Net income |
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- |
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Currency translation adjustment |
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Change in qualifying cash flow hedge, net of tax |
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Issuance of common stock for exercise of options, RSU vesting and employee stock purchases, net |
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- |
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Repurchase and cancellation of convertible preferred stock |
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- |
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- |
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( |
) |
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( |
) |
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Preferred stock dividend |
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( |
) |
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( |
) |
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Stock compensation expense |
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Balance as of March 31, 2018 |
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$ |
- |
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$ |
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$ |
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$ |
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|
$ |
( |
) |
|
$ |
|
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|
$ |
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
|
2019 Q1 10-Q Report |
Stericycle, Inc. • 8 |
STERICYCLE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In millions, except per share data and unless otherwise indicated)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Summary of Significant Accounting Policies
Basis of Presentation: The accompanying unaudited 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 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 March 31, 2019 and for the three months ended March 31, 2019 and 2018 have been prepared pursuant to the rules and regulations of the 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 2018 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 or any other period.
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 long-lived asset and goodwill impairment assessments. 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.
Leases (Accounted for as of January 1, 2019 and thereafter under ASC 842): Operating leases are included in Operating lease ROU assets, Operating lease liabilities and Long-term operating lease liabilities on our Condensed Consolidated Balance Sheets. Finance leases are included in Property, plant and equipment, Current portion of long-term debt, and Long-term debt on our Condensed Consolidated Balance Sheets.
Operating lease ROU assets, operating lease liabilities and Long-term operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at
|
2019 Q1 10-Q Report |
Stericycle, Inc. • 9 |
commencement date. Nearly all of our lease contracts do not provide a readily determinable implicit rate. For these contracts, the Company uses an estimated incremental borrowing rate, which is based on information available at the lease commencement. The Company used incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date.
Our leases generally do not require material variable lease payments and generally do not contain options to purchase the leased property, any material residual value guarantees, or material restrictive covenants. At commencement, the operating lease ROU asset is equal to the lease liability and is adjusted for lease incentives and initial direct costs incurred. We review all options for the Company to extend, terminate, or purchase its right of use assets at the commencement of the lease and on an ongoing basis and account for these options when they are reasonably certain of being exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, including payments for common area maintenance and vehicle maintenance costs, which are accounted for separately for each class of underlying assets.
In addition, the Company applies the short-term lease recognition exemption for leases with terms at commencement of not greater than 12 months.
Adoption of New Accounting Standards:
Leases
In February 2016, the FASB issued ASC 842. The amended guidance, which was effective for the Company on January 1, 2019, requires the recognition of lease assets and lease liabilities on the balance sheet for those leases with terms in excess of 12 months and previously classified as operating leases. The Company elected the optional transition method which allows entities to continue to apply historical accounting guidance in the comparative periods presented.
The Company elected to apply a package of practical expedients which allowed us to not reassess at transition: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases and (iii) whether initial direct costs for any expired or existing leases qualify for capitalization under the amended guidance.
The standard had a material impact on our Consolidated Balance Sheets, but did not have an impact on our Consolidated Statements of (Loss) Income. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged (see Note 5 – Leases).
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 was effective for us on January 1, 2019, and the adoption did not have a material impact on our Consolidated Financial Statements.
|
2019 Q1 10-Q Report |
Stericycle, Inc. • 10 |
Stranded Tax Effects
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): 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 Tax Act to be reclassified to retained earnings. ASU 2018-02 was effective for us on January 1, 2019. The adoption of ASU 2018-02 did not have a material impact on our Consolidated Financial Statements.
Stock Compensation
In June 2018, the FASB issued ASU 2018-07 “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 extends the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 was effective for us on January 1, 2019. The adoption of ASU 2018-07 did not have a material impact on our Consolidated Financial Statements.
Changes in Stockholders Equity and Noncontrolling Interest
In August 2018, the SEC issued the final rule on Regulation S-X, Rule 3-04 (“Rule 3-04”) requiring entities to disclose changes in stockholders’ equity in the form of a reconciliation for the current and comparative year-to-date interim periods, with subtotals for each interim period. The Company adopted Rule 3-04 in the first quarter of fiscal 2019.
Accounting Standards Issued But Not Yet Adopted
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. We are evaluating the impact of adopting ASU 2016-13 on our Consolidated Financial Statements.
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 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 on January 1, 2020 with early adoption permitted, including adoption in any interim period. We are evaluating the impact of adopting ASU 2018-15 on our Consolidated Financial Statements.
|
2019 Q1 10-Q Report |
Stericycle, Inc. • 11 |
NOTE 2 – REVENUES FROM CONTRACTS WITH CUSTOMERS
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 RCS and International RCS:
|
In millions |
|
||||||||||||||||||||
|
|
Three Months Ended March 31, 2019 |
|
|||||||||||||||||||
|
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 |
$ |
|
|
$ |
|
|
|
$ |
|
|
$ |
|
|
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